It’s time to ask a rude question: Is Canada still worth investing in?
Before you rush to deliver an appropriately patriotic response, think about the issue for a moment.
A good place to begin is with the federal government’s announcement this week that it is forming a task force under former Bank of Canada governor Stephen Poloz. The task force’s job will be to find ways to encourage Canadian pension funds to invest more of their assets in Canada.
Wooing pension funds has become a high-priority matter for Ottawa because, at the moment, these big institutional investors don’t invest all that much in Canada. The Canada Pension Plan Investment Board, for instance, had a mere 14 per cent of its massive $570-billion portfolio in Canadian assets at the end of its last fiscal year.
Other major Canadian pension plans have similar allocations, especially if you look beyond their holdings of government bonds and consider only their investments in stocks, infrastructure and real assets. When it comes to such risky assets, these big, sophisticated players often see more potential for good returns outside of Canada than at home.
This leads to a simple question: If the CPPIB and other sophisticated investors aren’t overwhelmed by Canada’s investment appeal, why should you and I be?
It’s not as if Canadian stocks have a record of outstanding success. Over the past decade, they have lagged far behind the juicy returns of the U.S.-based S&P 500.
To be fair, other countries have also fallen short of Wall Street’s glorious run. Still, Canadian stocks have only a middling record over the past 10 years even when measured against other non-U.S. peers. They have trailed French and Japanese stocks and achieved much the same results as their Australian counterparts. There is no obvious Canadian edge.
There are also no obvious reasons to think this middle-of-the-pack record will suddenly improve.
A generation of mismanagement by both major Canadian political parties has spawned a housing crisis and kneecapped productivity growth. It has driven household debt burdens to scary levels.
Policy makers appear unwilling to take bold action on many long-standing problems. Interprovincial trade barriers remain scandalously high, supply-managed agriculture continues to coddle inefficient small producers, and tax policy still pushes people to invest in homes rather than in productive enterprises.
From an investor’s perspective, the situation is not that appetizing. A handful of big banks, a cluster of energy producers and a pair of railways dominate Canada’s stock market. They are solid businesses, yes, but they are also mature industries, with less than thrilling growth prospects.
What is largely missing from the Canadian stock scene are big companies with the potential to expand and innovate around the globe. Shopify Inc. SHOP-T and Brookfield Corp. BN-T qualify. After that, the pickings get scarce, especially in areas such as health care, technology and retailing.
So why hold Canadian stocks at all? Four rationales come to mind:
Canadian stocks have lower political risk than U.S. stocks, especially in the run-up to this year’s U.S. presidential election. They also are far away from the front lines of any potential European or Asian conflict.
They are cheaper than U.S. stocks on many metrics, including price-to-earnings ratios, price-to-book ratios and dividend yields. Scored in terms of these standard market metrics, they are valued more or less in line with European and Japanese stocks, according to Citigroup calculations.
Canadian dividends carry some tax advantages and holding reliable Canadian dividend payers means you don’t have to worry about exchange-rate fluctuations.
Despite what you may think, Canada’s fiscal situation actually looks relatively benign. Many countries have seen an explosion of debt since the pandemic hit, but our projected deficits are nowhere near as worrisome as those in the United States, China, Italy or Britain, according to International Monetary Fund figures.
How compelling you find these rationales will depend upon your personal circumstances. Based strictly on the numbers, Canadian stocks look like ho-hum investments – they’re reasonable enough places to put your money, but they fail to stand out compared with what is available globally.
Canadians, though, have always displayed a striking fondness for homebrew. Canadian stocks make up only a smidgen of the global market – about 3 per cent, to be precise – but Canadians typically pour more than half of their total stock market investments into Canadian stocks, according to the International Monetary Fund. This home market bias is hard to justify on any rational basis.
What is more reasonable? Vanguard Canada crunched the historical data in a report last year and concluded that Canadian investors could achieve the best balance between risk and reward by devoting only about 30 per cent of their equity holdings to Canadian stocks.
This seems to be more or less in line with what many Canadian pension funds currently do. They have about half their portfolio in equities, so devoting 30 per cent of that half to domestic stocks works out to holding about 15 per cent of their total portfolio in Canadian equities.
That modest allocation to Canadian stocks is a useful model for Canadian investors of all sizes. And if Ottawa doesn’t like it? Perhaps it could do more to make Canada an attractive investment destination.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
