Five reasons why the TSX is underperforming — again
Well, the year is half over, and the Canadian market is — to put it bluntly — sucking once again. The TSX Composite Index is up a paltry 0.6 per cent so far in 2018. Compare that with the S&P 500 gain of 1.5 per cent, or Nasdaq’s nice 8.7 per cent return so far this year. Yes, the TSX is ahead of the Dow Jones’ return of -2.2 per cent for the year, at least.
In U.S. dollar terms, the performance widens. A U.S. investor in our market this year has lost 3.8 per cent, because of the weakness in the Canadian dollar. What’s going on here? We thought the economy was strong, and corporate earnings are solid? Here are five reasons why our market has not done so well. Unfortunately, it is hard to envision many of these reasons changing any time soon.
A WEAK CURRENCY
As noted above, international investors can lose money even when our market is actually (marginally) higher for the year. Currency plays a key role for international investors. Not just in absolute terms, but in an investor’s willingness to actually invest overseas as well. Our dollar is weak? This means less interest from foreign investors, so the TSX falters more than it would have otherwise.
CANADA IS NOT OPEN FOR BUSINESS
I don’t want to get political, but recent events, such as the blocking of the Aecon takeover and the TransMountain pipeline fiasco, do send a bad message to investors, particularly international investors. If Canada is not more receptive to business opportunities, for whatever reasons, international investors will take their money elsewhere.
NOT ENOUGH TECHNOLOGY IN OUR INDEX
A stat came out this week indicating the technology sector was responsible for 102 per cent of the gains in the U.S. market this year. In other words, without technology stocks, the U.S. market would be down on the year. Sure, everyone loves tech stocks. So how come the TSX index only has a 3.2 per cent weighting in technology? The S&P 500 technology weighting is 26 per cent, in comparison. No wonder the S&P 500 has outperformed our market. Canada has some great tech companies, such as Shopify and Constellation Software, but they just do not have enough weight in our country’s main stock index to actually help our market as defined by the TSX Index.
TRADE WARS
With the U.S. as our main trading partner, Canada is not going to be helped by the escalation of trade wars with the U.S. Our auto, steel and forestry sectors have already been impacted. Shares of companies in these sectors are very cheap, but investors don’t care — there is simply too much trade uncertainty to make a confident investment. Expect this issue to drag on for some time, potentially further limiting Canada’s stock market potential.
TOO MUCH DEPENDENCE ON RESOURCES & FINANCIALS
For the TSX index, the dominance of a few sectors is well known. How bad is it? Well, materials account for 11.8 per cent of the index; energy 20.1 per cent and financials 35.3 per cent. Together, these three sectors make up 67.2 per cent of our entire market, as represented by the index. Energy has staged a good bounce, up 7 per cent for the year, but financials are down 3 per cent. Materials are up this year, but with such a large weighting in financials the TSX as a whole has barely moved in 2018.
How do you, as an investor, adapt to this situation? Well, it is fairly easy: ignore the index. Set up your portfolio as you see fit. If you like technology, have a 20 per cent, or even 25 per cent, sector weighting. If you can’t stand energy, have minimal representation. If you have some mutual funds or ETFs, they already hold bank stocks (most likely), so maybe your financial sector weighting should only be 10 per cent, not 35 per cent. After all, you can’t spend an index, so maybe you shouldn’t bother following one.