Why Invest in Canada
There was a great article in the Financial Post on September 17 by Victor Ferreira, focusing on how fund managers lament the poor net gains for the S&P/TSX composite, despite it touching record highs in recent days.
He cites the fact that the S&P/TSX is only trading 11% above its high in May, 2008 before global markets spun into recession compared to the S&P 500 which has more than doubled since, gaining 114% during the same time frame.
So why does Canada lag? There are many reasons but it all starts with the difference in
S&P/TSX Composite Index
Financials 31.2%
Energy 16.2%
Materials 11.8%
Industrials 11.4%
Communication services 5.6%
Information Technology 5.6%
Utilities 4.6%
Consumer discretionary 4.3%
Consumer staples 4.1%
Real estate 3.6%
Healthcare 1.5%
S&P500 Index
Information Technology 22.1%
Healthcare 13.9%
Financials 12.8%
Communication services 10.5%
Consumer discretionary 10.2%
Industrials 9.2%
Consumer staples 7.6%
Energy 4.4%
Utilities 3.5%
Real Estate 3.3%
Materials 2.7%
The first problem is the dominance of our financial sector and the cyclical nature of commodities (energy and materials) that form the bulk of our index (59.2% versus 19.9% for the S&P500).
Another problem is the difference in the relative size of our growth sectors, including information technologies, healthcare, consumer discretionary, industrials and communication services (28.4% versus 65.9% for the S&P500).
And the biggest problem of all for us is the concentration of names representing the heaviest weighting in each sector. The lack of diversification by both sector and by company, severely limits our investment choices and narrows the opportunities for growth that is otherwise available on the global markets. So why invest in Canada at all you might ask when we represent just over 3% of the MSCI World Index compared to 63% for the U.S.?
In addition to the home bias that all investors have despite where they live, perhaps the biggest reason we do so is because we can ride on coat tail of our biggest trading partner’s success without taking on all of the currency or political risk involved and we are able to take on the more defensive domestic positions when needed as well.
The other great truth is we have great companies in Canada and we measure this greatest by their ability to grow their earnings year after year and raise their dividends in the process. This is why we focus on the basic and boring (BaB) companies for our Canadian stock portfolio and invest in other markets to gain more diversification and better growth opportunities while reducing the total risk profile of the portfolio at thesame time.
The other reason we hold Canadian dividend stocks is because of the special tax treatment they receive. A U.S. or other foreign dividend is taxed at your marginal tax rate, just like your other income while Canadian dividends are taxed at a lower rate from the dividend tax credit (DTC) they receive from the federal and provincial governments as a way to incentivize Canadians to invest in Canadian stocks. As an example, at$100,000 of income, Canadian investments attract 15% to 29% tax on dividends versus 35-46% for foreign dividend income.
Out of the twenty names that constitute our Canadian model portfolio, only four are considered truly domestic companies (BCE, Telus, Loblaw and Chartwell REIT). with the balance of the other fifteen names generating a growing percentage of their earnings from U.S. and international markets (contact us for a complete list of these stocks and the countries they do business in).
The point we are trying to make here is that investors are generally well served with a core holding of only the best Canadian companies supplemented with a wider holding of U.S. and international businesses that are well financed, well managed, profitable and leaders in their respective sectors.
David J. Angas
Senior Vice President, Financial Advisor
Family Wealth Counsel Advisor Group/Raymond James Ltd.
Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, David Angas, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.
