Sunday, October 8, 2017

Outlook Q4 2017




You hear quite often that Canada is a tiny part of world economy so keeping all your investments here is not proper diversification of your assets hence fraught with risk of unwanted volatility. I find this argument naive and in fact full of holes. Diversification has to be understood in a proper context. Indeed if you are a globe trotting citizen who spends equal time in say, Europe, Asia and the Americas, have family on these continents as well as obligations such as debt and assets there, your investment portfolio should reflect this diversity. But if much of your life is here in Canada including your family and other obligations, diversifying into far away lands is not only unnecessary but downright risky.


Diversification is the key element of portfolio management but i find geographical diversification is far less effective than sectoral allocation of assets. Perhaps in the eighties and nineties before global trade became as pronounced as they are today, geography did offer you some protection. Today most countries follow each other as far as stock performance is concerned. For example if price of oil rises, it not only benefits Canada but also Australia and Britain and in fact it is a sure indication that China is doing well. You would think that real estate is a very regional phenomenon but if you find Toronto and Vancouver house prices higher, check out Manhattan, London and Hong Kong. Money flows swiftly these days.




Another argument that supports "less Canada more abroad investment" is that our economy is concentrated in a few sectors, resources, financials and utilities making a very large part of the the Canadian stock market, TSX. This indeed is a valid point particularly if you are an income oriented conservative investor looking for slow and steady growth over decades with little desire to ride the ups and downs of resource stocks. By eliminating one big sector of resources, you are left with just the financials and utilities.


It is a coincidence that since the market melt down in 2008, the best sectors in Canada have been and continue to be financials and utilities which is where we find securities with best risk return profile. There is however a case to be made for finding technology stocks, particularly in the US to offer some diversification into growth ares which are just not available in Canada but that is far from allocating a disproportionate part of your portfolio out of Canada. Technology stocks in Canada are too small and small is risky as Blackberry, Nortel and Now shopify have found out. We just don't have a Google, Apple or Amazon here.



Last quarter showed better than expected economic growth in Canada and the US and once more the whole world is following suit. I think the world economy is slowly grinding its way out of the hole created by the great recession. While the Canadian stock markets lag the world this year but that is mainly because there are too many resource stocks in our market index. If you avoided pure resource plays and focused on dividend paying stocks and preferred shares as we do, performance was better than the averages.