Home country bias hurting Canadians

The S&P/TSX hasn't shared in the current strength of global stock markets. In fact, the Toronto market has lost ground since it reached an all-time high in February. Only a few industry sectors are responsible for the weakness. But Canadians' proclivity for home country investing keeps many at home and away from the party.

The rally in world equity markets that investors have enjoyed this year continues. But our own market, which participated in this rally up until February 21, has diverged from this trend in recent months.

And while Canadian stocks make up only about 3.5 per cent of the world equities market, Canadian investors, on average, hold about 60 per cent of their equity portfolio in Canadian stocks. This is one of the developed world's most extreme cases of home country bias in equity investing.

Since the beginning of the year, the MSCI World Index has returned a strong 9.7 per cent (11.3 per cent on a total return basis). Stocks in emerging markets have generally enjoyed the best performance-up 17.0 per cent year to date. The MSCI Europe, Australasia and Far East Index has not been that far behind, enjoying a gain of 12.0 per cent.

Despite the so-called Trump rally that has been credited with driving US stock markets higher, American equities have generally underperformed the world market. The S&P 500 has gained 8.9 per cent in 2017, while the Dow Jones Industrial Average is up 8.3 per cent. Only the NASDAQ Composite, driven by what some consider to be a bubble in tech stocks, has proven to be competitive with world markets, with a gain of 16.4 per cent.

Where does the TSX fit in all this?

In terms of percentages, the TSX has been one of the worst performing stock markets this year. Out of 22 major world equity markets, only Russia's RTS has performed worse, with a loss of 14.2 per cent this year.

Though the TSX has been the second-worst performer among the 22, it has nonetheless managed a gain of 0.2 per cent. Still, this is down from the 4.3-per-cent year-to-date gain it enjoyed on February 21.

Digging down into the TSX sectors, we don't have to look far before we find the culprits-and there are just a few of them.

Financial stocks, which account for just over a third of the market, have gained only 0.5 per cent since the beginning of the year. Negativity in the sector has been driven by concerns about the Canadian housing market.

Then too, worries about sub-prime mortgage lender Home Capital have weighed down the shares of financial stocks. But concerns about a potential bankruptcy at the lender have been alleviated by a debt-and-equity investment by Warren Buffet. Perhaps this will help shore up bank shares.

The TSX's second-largest sector is under water. Energy stocks have plunged 14.3 per cent year-to-date, reflecting a 24.3-per-cent decline in the price of west Texas intermediate oil, and an 18.5-per-cent drop in the price of natural gas. It looks like only a rally in oil prices will turn this situation around, and such an event does not look like it's forthcoming anytime soon.

The TSX's materials sector has made just modest gains this year. The sector is up just 2.2 per cent. This reflects weakness in metals and mining stocks caused by softness in commodity prices.

Aside from these sectors and healthcare stocks, the rest of the TSX's sectors have generally performed well this year.

It's possible the Canadian stock market can play catch-up in the coming quarters. The outlook for the global economy has improved lately, and if this continues, it may spur growth in Canada's resource sector.

This is an edited version of an article that was originally published for subscribers in the July 7, 2017, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

Money Reporter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846