"Canadians have been blinded by some dazzling returns in the U.S. and have overlooked what's been going on under their two feet."
This is a quote from the following Wall Street Journal article. Think about our great little Canadian Company - Net Shepherd, as you read it. Oh, and here is another quote from this article to keep in mind as you read through it . . .
"Canadian stocks are generally, sector by sector by sector, among the cheapest in the world," adds Mr. Best.
Crazy Canuk
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U.S. Investors Are Growing Bullish on Canada Markets
By JULIAN BELTRAME
Staff Reporter of THE WALL STREET JOURNAL
OTTAWA -- Do Americans know more about Canadian stock markets than Canadians?
That's what some analysts and money managers are asking as U.S. investors increasingly troll for market nuggets north of the border, while Canadians desert their home market in droves.
In the first seven months of 1999, U.S. residents increased their holdings of Canadian stocks by a record $6.53 billion, a 23% increase over the year-earlier period, and seven times greater than in the first seven months of 1997. More than 87% of the influx through July was invested in the four months beginning in April.
"For the first time in eight years I've been telling people to overweight Canada," says Donald Coxe, chairman and chief strategist of Harris Investment Management Inc. in Chicago, an arm of Bank of Montreal.
The message is sinking in. George Stairs, who co-manages the International Growth and Income Fund for Putnam Investments of Boston, says the fund has "significantly" increased its position in Canadian stocks.
Even the recent carnage in U.S. stocks -- the Dow Jones Industrial Average plunged 5.8% last week alone -- hasn't deterred the push north.
"You look at the valuations and compare them to the U.S., and they're just cheaper in Canada," adds Mr. Stairs, who says Putnam has bets on such Canadian stocks as Nortel Networks, Abitibi-Consolidated and Toronto-Dominion Bank.
Walter Casey, an analyst at Banc One Investment Advisors, Columbus, Ohio, says the attractive valuation is a major reason his company upped its position last month in Nortel, the Toronto networking company that has seen its share value quadruple in the past year.
"A month ago I felt Nortel had a better valuation" than one of its chief American competitors, Lucent Technologies of Murray Hill, N.J., Mr. Casey says. Though Nortel's recent price surge has all but eliminated the gap, Mr. Casey believes Nortel has better near-term prospects.
To be sure, the influx of U.S. capital in Canada is modest compared with American investments now being made in Asia. Yet it is important for Canada, helping the Toronto Stock Exchange 300 index handily outperform the Standard & Poor's 500-stock index so far this year.
That is a major change. Since the end of 1994, the S&P has climbed nearly three times as sharply as the Toronto index. The capitalization of the TSE is relatively small in global terms, however, with a market value of about one-fifth that of the Nasdaq and Tokyo exchanges.
Of course, the flight by Canadians from their home market has contributed to the bargains available in Canada. The nation's five major banks have a price-to-next-year's-earnings ratio of 9:1, compared with 15:1 for U.S. banks, 13:1 for banks in the United Kingdom and 18.7:1 for East Asian banks, says Dunnery Best, a senior vice president and director of Merrill Lynch Canada.
"Canadian stocks are generally, sector by sector by sector, among the cheapest in the world," adds Mr. Best.
The firming of the Canadian dollar after hitting a record low last fall also encourages investment. The Canadian currency has climbed 5% against the U.S. dollar so far this year, letting American investors cash in twice -- from a stock rise and from currency appreciation. At the same time, rising commodity prices have stimulated interest in Canada's many natural-resource companies.
At the same time, some sectors in the Canadian market are less cheap than they were earlier this year. Resource stocks have registered the three biggest industry group gains on the Toronto Stock Exchange this year. Stock prices this year have run about 39% higher for the paper and forest-products industry, 31% for oil and gas and 28% for metals and minerals.
Reflecting rising commodity prices, stock prices for Inco, the world's largest nickel producer, and for Domtar, the big wood-products company, have doubled this year. Among other major companies, Petro-Canada has seen its stock rise about 25%, while shares of Abitibi-Consolidated, the newsprint maker, have soared 50%.
But Mr. Stairs of Putnam Investments says other sectors of the Canadian market offer overlooked value. These include banks, which were blindsided last year by the government's decision to bar major mergers in the industry, and high-tech, particularly Nortel.
Despite the recent price inflation, Nereo Piticco, partner of PCJ Investment Counsel, a Toronto-based stock manager, says there is still plenty of value left in even fast-rising Canadian stocks. He says companies such as Domtar, and oilpatch companies such as Talisman Energy and Alberta Energy, offer good value.
"With the resource sector, you're looking at companies extremely well-managed that have executed well in a low-price commodity environment," he says. "They're poised to do extremely well as they get the benefit of better commodity prices."
So why are Canadians seemingly so reluctant to dive in? Excluding reinvested dividends, net sales of Canadian mutual funds investing in national stocks fell C$758 million during the first eight months of this year, after rising C$7.1 billion in the corresponding period in 1998. Meanwhile, Canadian net investment in foreign stocks rose C$12.96 billion in this year's first seven months. The figure increased C$5.11 billion in July alone.
If anything, Mr. Coxe of Harris Investment believes it's all a bullish sign. One of five key signs that a market is primed for a significant surge, he says, is that "the locals don't believe it."
His other signs: national currencies that bottom out after a steady slide; stock markets emerging from a prolonged slump with relatively low price/earnings ratios; foreign investment falling below historic levels; and the local government finally adopting a viable macro-economic policy.
"Canada has all five [conditions]," Mr. Coxe says.
But after five years of lackluster and negative stock-market returns, Canadians have become so discouraged they remain unconvinced. Yes, the TSE is rebounding now, says John Bart, a retired university professor in Toronto who describes himself as an active investor, but "for long-term investors your horizon is three or four years, not three or four months."
Mr. Bart, now president of the Canadian Shareowners Association, says he is putting his money in the U.S., particularly in technology stocks, and calls the recent retreat south of the border "a nice pause" when "some great stocks went on sale a couple of weeks ago."
Meanwhile, recent innovations by the mutual-fund industry have exacerbated the Canadian money flight, says Tom Hockin, president of the Investment Funds Institute of Canada. By law, individuals with registered retirement savings plans must put 80% of their funds in Canadian investments. But an increasing number of Canadians are jumping to complex investment vehicles that the mutual-fund industry has devised to circumvent this problem.
Canadians have been eager to snap up the investments. Says Mr. Hockin:
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OUT OF HIBERNATION: Investors are more bearish on the stock market than they've been in more than two-and-a-half years, according to a new poll of sophisticated investors from brokerage house Quick & Reilly.
The survey, taken from Sept. 21 to 24, found 21% of sophisticated investors calling themselves "bearish," the highest level since March 1997. And just 45% put themselves in the "bullish" camp, the lowest level since that same time, the poll found. A big 74% of investors said their outlook on the markets was now more bearish than it was six months ago |
