The volatility on
the Toronto Stock Exchange has continued over the past month while the
VIX — the U.S. index for market volatility — has stabilized. Some
Canadian investors are waiting for this volatility to ease before venturing back into the stock market. Those investors may be waiting a long time, as I believe a volatile TSX will be a fixture.
Currently, the TSX is dominated by three sectors: financials, oil and metal. The combined weight of these sectors makes up roughly 70 per cent of the market. Because oil and metal companies are regarded by many analysts as higher risk companies, one can easily see where the volatility on the TSX
comes from, and the dominance of these sectors doesn’t look to be on the wane anytime soon.
Canadians have always regarded commodities as a crucial part of their economy. However, if you look back just 10 to 15 years ago, Canada had other sectors that were just as important. There was a thriving manufacturing sector (primarily in Ontario), many different national retailers and a successful technology sector as well. Today, those
sectors are tiny in comparison after many companies were bought
by foreigners or merged to remain competitive. The TSX used to boast 300 companies, but today is made up of less than 280.
To build a diversified portfolio and thus reduce effects from volatility, a Canadian investor must purchase investments abroad. Many of us look to stocks trading on the New York Stock Exchange to help diversify into sectors that the TSX doesn’t have access to, such as health care and retail. There is added risk when you invest in stocks of another currency but with the loonie currently strong versus the U.S. dollar, Canadian investors can buy these stocks closer to par). In order to help protect an individual’s investments, one has to consider diversification.
Two ways to obtain nice diversity in a portfolio is
to either purchase foreign investment through Canadian mutual funds, which are able to invest up to 49 per cent in foreign companies and still
maintain their Canadian status, or through purchasing individual
securities trading outside of Canada in larger markets. Remember, Canada
makes up less than 5 per cent of the world’s wealth. An investor must incorporate foreign investment in different sectors in their portfolio if they truly wish to be diversified.
If you are an individual that is reluctant to invest until the volatility on the Toronto Stock Exchange has subsided, you may be waiting a long time. It won’t be until there is more diversity on the exchange itself before you finally see less volatility. The large and more diversified U.S. markets can provide more options when it comes to your investments, however you have to be willing to handle the currency exchange risk in some capacity.
If you have any questions regarding the above article or are looking for an Investment Advisor to help you with your portfolio, please send me an email at asmall@dundeesecurities.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.
