The Canadian equity marketplace, previously viewed rather dismissively by overseas investors as a staid market dominated by “hewers of wood and drawers of water,” has come into its own in the 21st century. In the first decade of this millennium, rampant demand for commodities fuelled by rapid growth in China, India and other emerging economies led to unprecedented interest in Canadian equities, as a result of which the benchmark Toronto Stock Exchange (TSX) Composite soared to a record high by June 2008. The subsequent global market crash did not spare the TSX as it plunged 50% in a matter of months, but the ensuing recovery cemented Canada’s reputation as one of the more resilient economies in the world.
Canada has fared better in boom and bust
While the savage worldwide recession of 2007-09 took a toll on most major economies, Canada escaped relatively unscathed for a couple of reasons. Firstly, the Canadian economy was in much better shape than most nations as the global economy was slipping into recession in 2008; thanks to the commodity boom, Canada was the only G-7 nation at that time to enjoy twin budget and current account surpluses. Secondly, the largest Canadian banks and financial institutions did not load up on toxic mortgage-backed securities during the 2003-07 U.S. housing boom. As a result, the Canadian financial sector did not witness the cascading bank failures seen in the U.S. and Europe from 2007 to 2009. In the aftermath of the global recession, the Canadian economy was the first G-7 economy to recover all the jobs lost in the downturn, and also endured a relatively short-lived correction in housing.
Why invest in TSX stocks
Canadian stocks collectively had a value of $2.34 trillion as of July 2014, accounting for approximately 3.6% of global market capitalization. Although only one-tenth of the size of the $23.5-trillion U.S. equity market, Canada has a disproportionate number of world-leading companies clustered in three critical sectors – financials, energy and materials. Most of these companies have solid balance sheets, sound management, and long-term records of growth and profitability. While the benchmark TSX Composite index has approximately 250 stocks, a sub-set of this index – the TSX-60 – consists of the best Canadian blue-chips.
Some of the world’s best companies
Overseas investors may be familiar with a handful of Canadian companies such as Blackberry; whose mobile devices ruled the roost before it was crushed by Apple and Samsung), TransCanada (TRP.TO, the pipeline giant whose Keystone XL project has been the subject of much controversy in the U.S.), and Valeant Pharmaceuticals (VRX.TO, which has been pursuing Botox-maker Allergan). But the TSX is also home to some of the world’s best run banks (such as Royal Bank of Canada RY.TO, Toronto-Dominion Bank TD.TO, Bank of Nova Scotia BNS.TO) and insurers (ManulifeMFC.TO, Sun Life Financial (SLF.TO), giant energy companies (Suncor SU.TO, Canadian Natural Resources CNQ.TO), the biggest commodity producers (Potash Corp PRK.TO, Goldcorp G.TO, Barrick Gold), and some of the most profitable railways (Canadian National Railway CNR.TO, Canadian Pacific CP.TO).
So how does one invest in TSX stocks?
There are two basic avenues of investing in TSX equities –
- Interlisted stocks: Interlisted stocks are those that are dually listed on a Canadian exchange like the TSX and on a U.S. exchange such as the New York Stock Exchange or Nasdaq. The major benefit of interlisted stocks to the U.S. investor is that it they can be purchased in U.S. dollars. More than three-quarters of the 60 stocks that comprise the TSX-60 blue-chip index are interlisted (including all the ones mentioned in the previous section).In fact, many of these interlisted stocks have the same ticker symbols on Canadian and U.S. exchanges. Altogether, close to 200 Canadian stocks are interlisted on U.S. exchanges.
- Exchange-traded funds and mutual funds: ETFs and mutual funds are another popular method of investing in a basket of TSX equities. For example, the iShares MSCI Canada ETF is a $3.6-billion ETF that has been around since March 1996. This ETF’s investment objective is to track the investment results of an index composed of Canadian equities. Its top ten holdings as of July 21, 2014 were – Royal Bank, Toronto-Dominion Bank, Bank of Nova Scotia, Suncor, Canadian National Railway, Canadian Natural Resources, Bank of Montreal, Enbridge, Valeant Pharma, and Manulife Financial. The ETF has an expense ratio of about 0.5%, making it an efficient way to invest in TSX stocks.
These stocks and funds can be purchased either through your online account or a full-service brokerage. As with any investment, ensure that these stocks are suitable for your investment objectives and risk tolerance, and seek qualified advice if necessary. Also note that as investing in Canadian stocks may have certain tax implications for overseas investors, familiarize yourself with these tax aspects and discuss them with your advisor.
The Bottom Line
One criticism of the TSX is that it is too heavily weighted to cyclical stocks whose fortunes depend on the domestic and global economies. As of July 21, 2014, the three biggest sectors on the TSX were Financials (comprising 34.4% of the index), Energy (26.3%), and Materials (12.3%). With almost 75% of the index consisting of these cyclical sectors, there is merit to the claim that the TSX may be overly susceptible to swings in the economic cycle. But if you believe that the long-term prognosis for the global economy is positive, and economic growth will translate into rising demand for commodities, TSX stocks are certainly worth considering for inclusion in diversified portfolios.
Disclosure: The author owned shares of Manulife and Suncor at the time of publication.