Has Canada’s luck run out?

Investors who have invested heavily in Canada have done well, but it may be time to look abroad.



From the June 2012 issue of the magazine.


For all the talk about our country’s strong banks and coveted natural resources, investors might be surprised to learn that Canada has lately had one of the worst-performing stock markets. At press time, the S&P/TSX Composite Index had fallen 13% over the last 12 months, while U.S. stocks had gained 4%. So far in 2012, even Europe is kicking sand in our faces.

This isn’t just a short-term trend. Canada’s glory days were back in the mid-2000s: we’ve lagged the global markets over the last three years, and the U.S. has outperformed Canada over the last five. Are our best days behind us?

If so, investors don’t seem to care: most Canadians dramatically overweight domestic stocks, even though our market is tiny (5% of the MSCI World Index) and poorly diversified. Some Canadians even insist on 100% homegrown portfolios. “I’ve had clients ask, ‘Why should I invest anyplace else when my best investments have been Canadian?’” says Tony De Thomasis, a portfolio manager with De Thomas Financial in Thornhill, Ont.

One of the reasons our stock returns have been sluggish is that Canada is now perceived as lower risk compared with the rest of the world. “Admired economies typically don’t produce great returns,” says Art Johnson, portfolio manager at Scotia McLeod in Calgary. We’re even seeing this in the bond market, he says. “I can get much higher yields outside of Canada for literally the same risk, because we’re so admired.”

Indeed, the best years for Canadian stocks followed a period when we looked like a banana republic: in the mid-1990s our credit rating was cut and we wrestled with a huge deficit.

No country’s outperformance lasts forever, so the best strategy is diversification. Since 1970, the average returns of Canadian, U.S. and international stocks have been remarkably similar, but they have varied dramatically over shorter periods. That’s why holding a globally diversified equity portfolio—say, one third in each region—lowers volatility without sacrificing returns. Many Canadians ignored that advice when we were on top of the world. Maybe now it will sink in.

3 comments on “Has Canada’s luck run out?

  1. Great article Mark,
    I’ve always been one to think outside of the box regarding finding solutions to curb growing concerns. In my opinion, Canadian companies should consider marketing themselves to foreign markets a little more.

    I’m willing to bet a majority of the MoneySense readers most likely never heard of this site even though it’s actually rated as fastest growing investment forum in the entire world right now and it’s free for anyone to use too. While the majority of the boards are US companies, it actually has a message board with a chart and stock quote for every company traded on the TSX right now and nobody from Canada has taking advantage of it simply over the fact that the site is less than four months old.

    I can’t think of a better way for us to market our Canadian investments other than taking ownership of them unmanned boards and expressing to others why we invested in company XYZ.


  2. This describes me ,a boomer and my energy based brokers who typically don't
    look past downtown Calgary and seem to prefer the wild ride of the oil patch.(I think it's Stampede week)……..Phil


  3. I agree with Rich about foreign investment but we have to remember that most countries are going through a downward trend at the moment and with the way the global economy works taking a step upwards is hard to do on your own.


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