5 reasons why Canada’s stock market stinks

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He S&P/TSX Composite Index At the time of writing this column, the Canadian index was up almost four per cent this year. The S&P 500 had risen 14.7 percent and the Nasdaq 18 percent. Of all the major developed markets, the Canadian index performs the worst, with the exception of France.

If you are an American investor, the Canadian market looks even worse. In U.S. dollar terms, the S&P/TSX Composite Index is up just 0.7 percent this year. Investors could have made almost four times that amount by investing in a guaranteed investment certificate for half a year, with no angst, no risk, and no stress.

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Let's look at a longer period. Looking at annual returns since 2012, the S&P/TSX composite is up a cumulative 68.6 percent (not including dividends). That sounds pretty decent until one looks at the performance of the S&P 500 over the same period: a dizzying 234.5 percent. The US market has outperformed ours almost four times over this period. Adding in the currency impact, our market has returned a paltry 27 percent in US dollar terms in 12 years.

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So what's going on with the Canadian market? Why is it doing so poorly relative to global markets? Here are five reasons.

Economic performance and currency

Of course, you can't talk about stock markets without talking about economics. Frankly, and to be frank, the Canadian economy It just sucks compared to America. We are less competitive, we have higher taxes (just woken up), we are less productive and we spend more money.

The Canadian economy would already be in recession if it weren't for immigration spending. Our inflation rate rose this week, despite the slowdown. Canadian gross domestic product is estimated at around two percent this year, after narrowly avoiding an official recession in 2023 with growth of 1.1 percent.

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Because our stocks are tied to the economy, a weak economy (and therefore a weak dollar) prevents foreign investors from purchasing Canadian stocks, and the S&P/TSX Composite Index suffers. Imagine a broker's sales pitch to an American investor: “Would you like a return of almost 15 percent on US stocks or a return of almost zero on Canadian stocks?”

The index composition is incorrect.

Currently, the S&P/TSX Composite Index is made up of 30.7% financials, 18% energy and 14% industrials. In contrast, the S&P 500 is made up of 32.4% technology, 12.4% financials and 11.8% healthcare.

Of course, our canadian banks They’re a major part of the economy, but to be anywhere near a third of our index? Come on. If financials don’t outperform, then the index will never outperform. And energy? It seems like everyone hates carbon producers, but it makes up 18 percent of our index, while it only makes up 3.6 percent of the S&P 500. I think we can all agree that tech is likely to grow faster than banking and energy over the next decade, so why can’t the S&P/TSX composite reflect this?

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Shares with multiple votes

Perception in the United States is changing a bit, but in Canada there has been a preponderance of companies where management dominates control of the company through the use of multiple voting shares. For example, Teck Resources Ltd. It has class A shares with 100 votes and class B shares with one vote (note that Teck's structure will change in a few years).

In general, global investors do not support multi-voting share structures, nor should they. A management team with voting control but without control of the share capital does not make much sense. Management should be exactly aligned with shareholders: one vote per share. We believe these structures have harmed the attractiveness of the Canadian market to international investors.

Canadian companies are too small

Of the 226 companies that currently make up the S&P/TSX Composite Index, only eight have a market capitalization of more than $100 billion. A total of 125 companies, or more than half of the index, have a market capitalization of less than $5 billion. Four companies are worth less than $1 billion.

The company with the smallest market capitalization in the S&P 500 is Invesco Ltd., at $6.8 billion. There are 36 companies larger than our largest company, Royal Bank of CanadaFor any international investor, the Canadian market is really a very small playing field.

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too much inconsistency

The S&P/TSX Composite is primarily a capitalization-weighted index. Therefore, some stocks that are in the billion-dollar range tend to move in and out of the index on a semi-regular basis. If a particular stock does well one year, it is added. Then it has a weak year and is removed from the index.

Now, this isn't necessarily unique, but it does seem like some S&P/TSX Composite stocks move in and out of the index in a revolving door fashion. For investors, particularly those trying to match an index, this can make it very difficult to keep track.

Speaking of consistency, we have seen governments make multiple policy changes. For example, in 2006 there was the debacle of the income trusts, as well as this year's increase in the trust funds. capital gains inclusion ratewhich comes at a strange time considering our low growth. None of these elements make our market more attractive to international and even domestic investors.

Peter HodsonCFA, is Founder and Director of Research at 5i Research Inc., an independent investment research network that helps self-employed investors achieve their investment goals. He is also portfolio manager of the i2i Long/Short US Equity Fund. (5i Research staff do not own Canadian stocks. The i2i Long/Short Fund may own non-Canadian stocks mentioned.)

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