Market turmoil in Canada

What a difference a few months can make. Last year, on a calendar year basis, Canada was the fourth-best performing market in the world boasting a modest 7.4% return. With that modest return, it was not necessarily that Canada had an outstanding year but rather, that the rest of the world had a dismal year.

Unfortunately for Canada, they have gone from the fourth-best to the fourth-worst market in the world (year to date to the end of February 2001). According to Morningstar/Paltrak, the TSE 300 is down 9.4%.

What has caused all this volatility in Canada?

The key issue in Canada is that one company, Nortel, has had a significant influence on the TSE 300 benchmark. The TSE 300 is comprised of Canada’s largest 300 companies. If we hear that the TSE 300 has lost 9.4%, we assume that all 300 companies have gained or lost. This is very far from the truth.

In fact, there are 14 sub-sectors on the TSE and their year to date performance to the end of February 2001 is listed as follows:

TSE Conglomerates 18.8%
TSE Transport and Environment 16.8%
TSE Metals and Minerals 9.8%
TSE Consumer Products 9.3%
TSE Real Estate 3.0%
TSE Merchandising 3.0%
TSE Pipelines 1.3%
TSE Gold and Silver 0.6%
TSE Oil and Gas -0.1%
TSE Financial Services -4.2%
TSE Paper and Forest -5.9%
TSE Communications -6.2%
TSE Utilities -6.7%
TSE Industrial Products -28.1%

Most of the drop in the TSE 300 has come from one sector, Industrial Products. In fact, most of the drop in the TSE has come from one company, Nortel. The reality is there are still a lot of great companies in the TSE 300 that are profitable and increasing in value. As you can see 8 of 14 sub-sectors actually increased while the TSE 300 benchmark dropped 9.4%.

This narrow market phenomenon is not isolated to Canada. It also exists in other smaller world markets like Finland, which is heavily influenced by Nokia and Sweden, which is influenced by Ericsson. In all three markets, the benchmarks do well when Nortel, Nokia, and Ericsson do well. They also do poorly when influential stocks do poorly.

Lessons learned

  1. Don’t panic when you hear the benchmark like the TSE 300 is down, especially in a small, narrow-focused market like Canada. Just because the index or benchmark is down, does not necessarily mean that everything is down.
  2. Diversification is essential in any market environment. The principle of diversification is a timeless principle. No matter what the market environment conditions are, it is important to be diversified across different sectors. Investors with too much Nortel or too much technology are paying the price of concentration.
  3. Avoid having too much money in narrow-based markets like Canada, Finland, and Sweden. Diversification extends to geographic regions. For Canadian’s, it is important to extend geographic investing to large markets like the US, Europe, and Japan.
  4. All markets and all investments go up and down. While we are experiencing significant downs, remember that they will go back up. In other words, they will not go down forever. When I first started in this business, I read an article by Sir John Templeton and he said it best when he said: “Sell at the height of optimism and buy at the height of pessimism.” I think we are near the height of pessimism.

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