Canada’s bullish equity market is nearing its end as the U.S. subprime mortgage crisis, high oil prices, and the surging Canadian dollar conspire to increase risk and lower returns, according to an expert panel.
At the annual Investment Outlook and Opportunities Forum presented by Franklin Templeton Investments at Toronto’s Roy Thompson Hall on Thursday, Michelle Horne, resident of Bissett Investment Management, told the audience that the exceptional investment performance seen in the past five years in the Canadian equities market is almost over, with fewer stocks posting positive returns.
“Canada is nearing the end of its long-running bull market,” she said, adding that she expects the S&P/TSX composite index to cool as commodities begin to fall.
Horne warned that while still strong, Canada’s economy is overly dependent on the materials and energy sectors, which account for over 53% of the benchmark index. “The one thing that investors have to be aware of in the Canadian equity market, even though we have had great returns, is the concentration in our market,” she said.
Horne explained that over the past five years, nine out of 10 sectors in the Canadian stock market have posted positive returns, with energy and materials accounting for 53% of that gain. “But in the past year, the number of sectors posting gains had been reduced to four with energy and materials contributing 188% to growth and more than offsetting the declines in the remaining six sectors,” she said.
As a result, investment security has deteriorated due to the market’s reliance on the energy and materials sectors, with only five key stocks having driven returns since June last year, explained Horne. Over this time the S&P/TSX composite index has risen 6.8%. This figure is comprised of a combined 8.9% increase in returns from Potash Corp. of Saskatchewan, Research In Motion, EnCana, Goldcorp, and Canadian Natural Resources. The remaining 248 stocks in the index actually declined by 2.2%. Don Reed, President of Franklin Templeton Investments told the crowd that difficult times such as these require a cautious, methodical approach to investing. “Canadian investors must get back to the basics and stick to proven investing principles in times of market uncertainty,” he said.
Explaining his mantra of seeking opportunity during times of pessimism, Reed said the high Canadian dollar allows for significant savings when investing in foreign markets. “To buy assets outside of this country is probably a good thing to do because I can buy them cheaper than I could have bought them seven years ago,” he said. “That holds for financial assets and it holds for many assets.”
Reed said the best international market currently is the United Kingdom, and that the Japanese stock market, while the third-largest in the world, is not attractive at present due to economic issues and its aging population.
Reed said that investors looking for long-term assets currently have an opportunity to buy undervalued stocks with good fundamentals at cheap prices. “Pessimism is opportunity,” he said. “It can’t get gloomier.”
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