WEALTH Matters — SPRING 2010

Investment markets

2010 began with optimism that the world was slowly returning to normal after the worst recession and stock market declines most have ever experienced. And although the first quarter of the year was positive for both Canadian and US stock markets, it came with the volatility that is typical of these markets.

 

Just after an encouraging start to January both markets suffered a setback due to multiple factors: fear that new US banking regulations would limit industry growth, lighter-than-expected global oil consumption, China’s indication that it may try to limit its rate of economic growth, and fears of the swelling public debt of several European countries, especially Greece. Graph 1 shows the volatility – a 6% to 8% decline in value for both Canadian (TSX) and American (SP&P500) indices.

 

Many of these fears later abated on policy adjustments, positive economic news and resumed commodities demand, and the quarter ended in positive territory, the TSX up 3.1% and the S&P up 5.4% for the first quarter.

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Graph 2 shows the first 3 months of 2010 in a dashed box at the right hand side to put this in perspective. Canadian Equity investors (orange line) are up 30% over 5 years, or about a 5% annual average return - including the swooning setbacks of 2008-2009.

 

US equities are up only about 6% in the same period. The US market has less exposure to oil and minerals, and also lacks the strong financial services sector, both of which have boosted the Canadian market.

These US returns would be even lower for investors purchasing with Canadian dollars. It’s hard to believe that as recently as mid-2007 the CDN $ was averaging only about 85 cents, or less! US-Canada dollar parity is a very recent phenomenon.

 

The rise in the CDN $ means the same US dollar value of investments would be worth less in CDN $ now than it was years ago – therefore this reduces the CDN $ return on US assets. The US economy is bouncing back from dire circumstances, so it’s possible their stock markets and their currency could both strengthen in coming years, outperforming us even in CDN $. Having a diversified portfolio spreads out the risk and provides you with an average of the extremes in the range of returns. Some portfolios hedge the currency risk, but over a longer term, these effects tend to average out anyway, and may not be worth the cost of hedging.

 

Please call us if you would like to review your own situation with us.

 

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