Is investing in Canadian equities riskier than you think? According to one professor of finance, Canada is No. 1 when it comes to the percentage of money-losing companies trading on its public markets. But there may be more to this doom-and-gloom declaration than meets the eye. This fact further shows why it’s important for investors, no matter how experienced they are, to diversify across a number of industries and even countries.
Investing in Canadian Equities is Risky?
Aswath Damodaran, a professor of finance at New York University, crunched some numbers, and believes that when it comes to the riskiest countries to invest in, Canada comes out on top. In fact, Canada ranks No. 1 when it comes to the percentage of money-losing companies on Canadian markets.
1 In his blog, Damodaran looks at a number of different ways to determine how much risk investors take on. One way is to compare a stock’s 52-week high and 52-week low and express that range as a fraction. Do this for every stock in a particular market and you’ll come up with a volatility figure. This HiLo figure shows that Canada was, on average, the riskiest market in the world in 2018. Canada was in good company; the U.S. and Australia also ranked high on volatility. Two countries that were relatively stable: Russia and Japan. Canada also came out on top when it comes to the typical price spread of a share price. Australia and New Zealand were right behind us. The U.K. and U.S. closed out the top five. Does this mean Canadian investors should be concerned about investing in a risky country like Canada? You have to read between the lines to understand how it is that Canada, one of the most stable economies in the world, could be viewed as being so risky. For starters, 37% of all the stocks listed on the TSX and TSX Venture Exchange are from the mining sector, followed by oil & gas, technology, and industrial products & services—all tied at six percent.
2 For every big mining, tech, and oil stock, there are dozens of smaller companies operating in the same industries that most people are not familiar with. The majority of these companies were hurt in 2018 because of falling oil and gas and metal prices. There was also a proliferation of pot companies being listed on the TSX in 2018. The cannabis industry is still in its infancy and many of those companies will be volatile for the foreseeable future. U.S. markets don’t have to worry about cannabis companies hurting how risky their exchanges are. Marijuana is a controlled substance, on par with LSD and heroin; marijuana companies with operations in the U.S. cannot be listed on the NYSE or NASDAQ. Moreover, mining, energy, and biotech companies are riskier in general than utilities, railways, and banks when it comes to stock-price variability. Those kinds of companies are listed on the TSX, but not enough to offset the massive mining sector. Still, Canadian banks have consistently rated as the strongest financial institutions in the world. And Canadian utility and railway stocks also have a strong track record of growth. If anything, what professor Damodaran’s finding illustrate is how you can’t avoid risk altogether when it comes to investing. It’s important though to know which sectors are riskier than others; understand what your personal risk tolerance is; and to diversify across sectors, industries, and countries.
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info@learn-to-trade.com. Sources:
- “January 2019 Data Update 4: The Many Faces of Risk!” Aswath Damodaran blog, January 27, 2019; http://aswathdamodaran.blogspot.com/
- “Toronto Stock Exchange and TSX Venture Exchange,” Toronto Stock Exchange web site, last accessed January 29, 2019; https://www.tsx.com/resource/en/1898/mig-report.pdf.
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