You do not have to look very far these days to find the hot topics on investing. I call these trendy thoughts the four C's of investing.
- Crude. In late June, oil prices jumped past the $60 US a barrel mark for the first time ever. As consumers, we are feeling the price pressure when we jump to the pump and gas is over $1 per litre in most parts of Canada. Most advocates of investing in crude feel that prices should continue to rise because of the continued rise of oil consumption worldwide. With China and India growing at significant rates, expert's worry that production cannot keep up.
Contrarians on the other hand will tell you that it may be the right time to take profits and reduce exposure to the Oil and Gas sector. Consider that back in December of 1999, the Oil and Gas sector represented 8.3% of the TSX. By June of 2005, that weight has more than doubled to 23.9% of the TSX. Be careful when you hear the four most expensive words in history “This time is different” because the fact remains that everything goes in cycles and what goes up comes down.
- Canada. Another trend in investing is Canada. The TSX has been a very strong market for the last 5 years. Although Canada has some diversity in the markets, economist Bill Sterling of Trilogy Advisors suggests that there is a very high correlation between strong Canadian market performance and rising oil prices. If oil and gas continues to strengthen then Canada should continue to be an overweight for investors.
When you look at the buying patterns of investors, there has been a significant movement of money from global investments back to Canada. However, market data suggests that the last five years is not sustainable over long periods of time and that investors should look to diversify some of their investments into the global markets to enhance returns and reduce risk. It will be interesting to see what will happen when the world markets start to outperform Canada again especially given the recent changes to the foreign content limits in the last budget.
- Currency. One of the reasons world markets have not looked as attractive to Canadian investors is because of currency. Significant currency changes have played a major role in determining investment performance. The Canadian dollar has outperformed other currencies, especially, the US dollar. Interestingly, the world markets have done quite well but because of the strength of the Canadian dollar, returns do not look as attractive to the Canadian investor. Canadian investors, who want to remove currency risk, should keep more of their investments in Canada. However, if currencies go in cycles just like markets go in cycles, currency may work in favour of Canadian investors sometime in the future.
- China. China has been a powerful growth story. The expansion of China's industrial capacity has been nothing short of astonishing. There is no question that China has a lot of economic potential over the long term but it will come with some volatility and risk. Whatever the case may be, one thing is clear. Whatever happens in China will matter more and more to global financial markets.
They key principle of investing is diversification. Avoid too much exposure to any single investment, sector, style and country. When I listen to the arguments for China, there are definitely some parallels to the emerging market story in the early 1990s. At the end of the day, that was more of a story than substance so be cautious about too much exposure to the Chinese market.
Although these stories have had significant impact to investors, you must remember that trends come and go. How long will these four C's remain trendy? Only the future knows, so be careful about getting too overexposed to any single idea no matter how good it sounds.