First half of 2013:
Diversified investors benefit as markets head higher
Diversifying your portfolio to include global equities is an important investment strategy. And Canadians who invested abroad, benefited when US markets began to rise last fall and over the first half of this year. The rally, in part fuelled by investor confidence in the recovering US economy and the US Federal Reserve’s decision to keep interest rates at record lows, helped push both the Dow Jones Industrial Average and the more broadly-based
S&P 500 to all-time highs.
Investors with their portfolios largely invested in Canadian equities, did not fare as well. Like its US counterparts, the S&P/TSX Composite started the year strongly, but failed to carry through and drifted sideways over the first six months of the year. In part, the TSX, which is heavily concentrated in energy, mining and financials, was held back by a sharp selloff in the price of gold bullion, which spilled over into the stocks of gold mining companies.
Gold loses its luster
After reaching $1,888 an ounce on August 22, 2012, gold has fallen steadily, and was trading below $1,400 at the end of May. At the same time, slumping demand on international markets, kept the broader energy and commodity sectors from putting together a sustained rally, with the bellwether oil price trading in the $85 to $100 range.
Doubts surrounding the ability of Canadian financials to continue posting strong returns also undermined the S&P/TSX Composite. Canadian banks, which are among the strongest in the world, came under selling pressure with some analysts believing the banks are overexposed to the real estate sector, and could be hurt if there was a collapse in housing prices. However, because the bulk of mortgages issued by the banks are ensured by CMHC and backed by Canadian taxpayers, the banks would largely be protected if home prices fell.
Positive economic signals
Despite the S&P/TSX Composite’s tepid performance over the first half of the year, there were positive signs. For one, the Canadian economy delivered 95,000 new jobs in May, the largest single-month increase in a decade, and dropped the unemployment rate to 7.1%. And most of those new jobs were full-time positions, and nearly all were created by the private sector.
Still, Norman Raschkowan, Mackenzie Investments’ Chief North American Investment Strategist, says the global economy is expected to grow slowly over the balance of the year, and may limit the S&P/TSX to single digit returns this year. Looking beyond 2013, a surge in commodity prices does not appear imminent, which suggests that Canadian investors may continue to benefit from foreign diversification.
But the transition from a US Federal Reserve-induced falling interest rate environment to an economy-induced rising rate environment in the US might result in continued volatility in equity markets, which may limit gains through the balance of the year. However, this is a healthy development providing a potential foundation for future equity gains.
Diversify for long-term gains
If volatility does increase, it’s always important to remember that markets move in cycles, but the trend line over time has always been to the upside. In fact, a recent study looked at the last nine market downturns to determine what would have happened if you’d invested on the eve of each downturn. The result: if you held for five subsequent years, your portfolio would have made money – every time.
That’s why it’s interesting to look at the long-term performance of the S&P/TSX Composite. Despite all the political turmoil and ups and downs in the economy over the last 30 years, $10,000 invested in 1993 has grown to $100,000 – a 9.2% compound annual return.
And those returns are why many financial advisors recommend that their clients ignore the daily gyrations in the market, and invest in a diversified portfolio in Canada and abroad for the long term.