By Joanna Pachner
Sympatico/MSN Finance
Monday, January 01, 2007

It's been almost two years since Ottawa lifted the 30% cap on foreign investments that you could hold inside your RRSP, to loud cheers from the mutual fund industry. After all, Canada represents less than 3% of the global economy, and the performance of its main equity market, the Toronto Stock Exchange (TSX), has historically lagged its foreign counterparts.

Adrian Mastracci, fee-only portfolio manager at KCM Wealth Management in Vancouver, says, "You should make foreign investment an integral part of your portfolio's mix."

Yet there's little reason to believe Canadians have leapt at the opportunity to up their foreign holdings. In fact, most of us were far below the 30% threshold when it existed. A 2002 survey by RBC found that the average investor's RRSP portfolio held less than 10% in foreign content, and about a third had none.

This year, however, may finally see more loonies venture abroad. Canadians' love affair with income trusts is souring now that the Conservatives have announced new taxes on the popular funds, pushing some of that money to seek a home elsewhere. As well, the TSX has had a stellar four years, which means there aren't many bargains among large Canadian companies. Meanwhile, hot foreign markets such as China, India and Brazil are starting to look less risky as more Western capital flows in, more targeted financial products become available to retail investors, and more world-leading companies, such as Brazilian aircraft maker Embraer or India's outsourcing giant Wipro, show their potential for growth.

The consensus among economists and analysts is that 2007 will see global markets slow but remain healthy. With the U.S. losing steam and the major developing economies gaining maturity, some global-equity experts foresee investment streaming in new directions. Michael Hughes of Baring Asset Management in London, for example, told BusinessWeek magazine recently that he expects a "shift from the West, and particularly the U.S., to Asia, Eastern Europe and parts of Latin America."

So how should you play the global game? For starters, just because you no longer have limits doesn't mean you ought to overindulge. "You should make foreign investment an integral part of your portfolio's mix," says Adrian Mastracci, a fee-only portfolio manager at KCM Wealth Management Inc. in Vancouver, but adds, "Generally, I wasn't hampered by the 30% limit." Take the 60/40 growth/fixed-income split that many investors employ: of the 60% growth portion, he suggests putting 25% in Canadian equities, 20% in U.S. stocks and 15% around the globe. "Look for diversified baskets of ETFs [exchange-traded funds] or mutual funds so nothing is going to hit you too hard if it goes sour," he says. "And it would be better to stay with quality companies, so check what the fund's invested in."

Martin Gale, who runs Efficient Market Canada, a website offering RRSP advice, is more aggressive in his mix. His suggests a portfolio comprising 35% American equities; 25% European, East-Asian and Far-East stocks; and another 10% in emerging markets. "Such a portfolio would ensure that you are globally diversified roughly in proportion to the size of the economies around the globe," he writes on the site. He also points out that "Canadian equities receive very favourable treatment outside an RRSP in the form of the dividend tax credit. Therefore... it may make perfect sense to have an RRSP with no Canadian equities if adequate exposure to the Canadian equity market can be held outside the RRSP."

A survey of economic and investment forecasts points to the following hot spots for 2007:

The commodity boom has done wonders for Brazil. Once a deadbeat debtor with soaring inflation, it is now one of the fastest-developing countries whose citizens' lust for consumer goods is growing in step with their rising incomes. That's where the smart money is heading: serving the middle class with homes, electronics and entertainment services.

The two giants, China and India, have grown up a lot in the past few years, and that's meant a shift in the investment opportunities: as with Brazil, the focus now is on providing goods and services to the emerging middle class. But it's Japan that's been drawing the most attention. The country's stocks didn't do well in 2006 despite solid corporate earnings, but that's all the more reason why many expect a turnaround: Japanese companies now look cheap compared to North American ones, the country has invested heavily in neighbouring China to tap its growth, and interest rates are the lowest of any industrialized country.

United States

The big question is, will the giant crash this year, tripped up by the real estate bubble and massive debt, or will it just gently decelerate? The optimists find American stocks looking cheap compared to Canadian ones, and offering vastly more choice and liquidity. But what if the Iraq quagmire worsens?

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.