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Oil Obscures Other Industries’ Strengths

By Jeffrey Sindall, January 15, 2016


Upon opening your 2015 year end mutual fund statement you may have a sinking feeling. After a couple of years of steady growth, Canadian stock prices have declined over the past six months.


IN BRIEF: Except for companies in the resource sector (especially the oil industry), companies in all other sectors are doing fine. In particular, financial services companies (especially banks) continue to be very profitable. THERE IS ABSOLUTELY NO REASON TO BE CONCERNED ABOUT THIS TEMPORARY STOCK MARKET DECLINE NO MATTER HOW BAD IT GETS. Based on past experience, equities will regain their value in about six to nine months. Please stay invested for the long term!


If you would prefer mutual funds with lower volatility than what you currently own, please let me know.


LONG EXPLANATION: We are witnessing a resurgence of fear and scepticism wrongly applied to the entire Canadian equities market (and those of other countries, too). Yes, the continued surprising and bewildering low price of oil is affecting Canada, but not so much as the news media would lead you to believe because the impact is mostly restricted to Alberta and the energy and resource sectors. Yes, China's economic growth is slowing in percentage terms however it is still growing strongly in absolute terms (the growth is a smaller percentage of a much larger economic base compared to just 5 years ago).


Also, please understand that a significant portion of Canadian company stocks are held by Americans and it's quite possible that over half of the daily transactions occurring on the Toronto Stock Exchange are done by Americans. Here's the evidence: on a typical business day about 200 million shares are transacted on the TSX. However, on November 26, 2015, which was the American Thanksgiving when the TSX was open but without American initiated transactions, the trading volume was only 61.3 million shares – much less than half of normal!


Now try to imagine it's late 2015 and you are an American residing somewhere in the United States who owns some shares of Canadian companies. You see that oil prices are very low and you understand that oil is one of Canada's major exports and sources of revenue. The Canadian dollar has depreciated 25% compared to the US dollar so your Canadian stock holdings in your US dollar account already appear to have crashed by 25% and you have heard that US interest rates may increase while Canada's might decrease, possibly further widening the exchange rate. Canada also has a new Prime Minister who appears popular but young and with unproven leadership capabilities or experience managing a national economy. What are you most likely to do with your shares of Canadian companies?


If you answered "sell" then you appear to be in agreement with many American owners of Canadian stocks. Yet you would be making a mistake. You did not even consider the profitability of the Canadian companies. Already factors like "earnings per share" and "dividend yields" are extremely attractive for existing and new investments. Apart from the energy sector, Canadian corporate profits are fine. Canadian bank profits in particular are outstanding, and bank CEOs say that the Canadian economy will weather the oil rout. Also, during 2015 full-time employment rose 151,000 or 1% (Stats Canada).


A currency exchange rate is indicative of the relative supply and demand for each currency. When Americans sell shares of Canadian companies they are contributing to lower Canadian equity prices (by adding to the supply of stocks on the market) and they are contributing to a lower Canadian dollar when they convert back to US dollars. Lower prices for oil exports means fewer US dollars being brought into Canada for conversion to Canadian dollars. The cash flow is out of balance causing a relative depreciation of our Canadian dollar. However, in a short time economic and business activities will adjust and take advantage of the currency discrepancy. Canadian businesses exporting to the US are already seeing increased sales and profitability. More Canadians will vacation within Canada and also reduce or delay purchasing and importing American products or services. When the price of oil increases (as it will eventually) and confidence in Canadian stocks is correctly restored, then the Canadian dollar and equity prices will appreciate again.


It takes only a relatively small number of people, perhaps speculative "day traders" disregarding how well most corporations are really doing, to create an over-supply of stocks in the Canadian equity market causing lower prices. There is a temporary disconnect between stock prices and actual corporate values. Selling now would be a mistake. The great majority of shareholders continue to hold their shares, while smart investors buy more shares at low prices. Remember that every stock being sold at a lower price is also being smartly purchased by someone else. Right now it is a buyer's market!


Canadian investors have no need to be concerned. This is a fantastic opportunity to invest more money in excellent Canadian businesses while equity prices are a bargain. At the very least, please stay invested.


If you have any questions or would like to take advantage of this opportunity please phone us at 905-389-3534.


Jeffrey Sindall is a Financial Advisor and owner of Abbington Investments in Hamilton, Ontario.