By Malcom Morrison
Canadian Press
Tuesday, December 21, 2004
TORONTO (CP) - North American stock markets advanced in 2004, but it was the Toronto market that outshone New York blue chips as global demand for commodities, particularly by China, sent shares up sharply.
Adrian Mastracci, ‘fee-only’ investment counsel at
Vancouver’s KCM Wealth Management, says, "I see portfolios in the 75 to 90 per cent equity allocation. That's brutal because when you actually do the real investor profile, most people are somewhere between 40 and 60 per cent as far as a comfort level in equities.”
"For Canada, it was a rather remarkable year, a significant outperformance for the Canadian equity markets," said Patricia Croft, chief economist and vice-president.
At the same time, the warnings are loud and clear that investors will have to work a lot harder for gains in 2005 as the Canadian dollar trades at 14-year highs and the U.S. dollar sells off as investors worry about huge trade and fiscal deficits and lower earnings.
Toronto's benchmark S&P/TSX composite index was slightly over the 9,000 points in early December, up about 10 per cent since the start of the year.
In contrast, Wall Street's Dow Jones industrials index was flat, up just over one per cent - while the Nasdaq gained about seven per cent and the S&P 500 rose about 6.5 per cent.
The U.S. indexes made up lost territory only in the last quarter as markets were hobbled during the year by higher interest rates, rising oil prices, worries that there wouldn't be a clear-cut winner from the U.S. presidential election and anemic job growth.
The TSX Venture Exchange, after surging about 50 per cent during 2003, also put in a flat performance during 2004.
The impressive performance on the Toronto market spelled good news to investors who chose to buy Canadian and cut exposure to other markets - even as such a move violated a basic tenet of investing.
"We're always talking about the need for diversification and telling people that you have to get outside of Canada because there are sectors such as health care where there's not a lot to choose from within our own borders," said Croft.
"But if you kept most of your assets in the domestic market, then it's been an enormous win the last two years."
For the Toronto market, it was largely all about oil as crude prices rocketed and energy stocks ran up big gains.
The TSX energy sector surged about 40 per cent during 2004 as oil producers struggled to keep pace. Red-hot growth in China helped spur global oil demand almost to capacity and crude prices peaked at more than $55 US a barrel - up about 70 per cent from a year earlier.
It was a banner year for mining stocks as well as huge demand for copper, nickel and other base metals from China helped send the TSX mining sector up about 12 per cent.
The good news is that these sectors should continue to do well in 2005.
"It's not likely they will be as strong next year, but even if you just assume prices stay where they are or pull back a bit, it's still going to be a very strong year for those sectors," said Gavin Graham, vice-president and director of investments.
The bad news is that the market will have plenty to act as a drag in 2005.
One of these is corporate earnings shock. Earnings in Canada stayed well within double-digit territory in 2004, as they did in the United States.
Statistics Canada reported in November that third-quarter corporate profits were up almost 20 per cent, slipping from a 26 per cent year-over-year gain in the second quarter.
Earnings also slipped in the United States.
"What will be another challenge in 2005 is that while earnings growth may be fairly decent, still above the nominal rate of growth, it's the trend that matters," said Croft.
"So we're going to see the deceleration in the level of earnings growth continue throughout the year and that will be problematic for the market."
The price of crude oil is to depress earnings growth, even after dropping about $10 US a barrel from record levels reached in October.
"Let's say it's $40 a barrel," said Graham. "Inevitably it drops in the spring because winter is out of the way and summer driving season hasn't started. So you might see seasonal weakness there.
"But if it sticks around $40, that's obviously going to be negative for most companies going forward because there's very little power to pass prices on."
Currency worries rooted in the U.S. dollar will also keep investors wary in 2005.
That's because the selloff in the American currency that helped bring the Canadian dollar up more than 20 per cent in 2003 accelerated during 2004, taking the Canadian dollar up 10 per cent to the 85-cent level in November for the first time since early 1992.
The big problem, as in 2003, has been the rapid rise of the loonie. That rise has damaged the economy to a point that economists said the Bank of Canada may put a hold on interest rate hikes.
These challenges will make it difficult for the average investor in 2005.
"I would think commodities should do reasonably well in the coming year," said Adrian Mastracci of KCM Wealth Management in Vancouver.
"I don't think China is going to slow down that much. Yes, they will likely have to slow down at some point in time. Even they are going to have some difficult times keeping that rate of change from year to year."
He says this is an excellent time for people to take a look at their mix of cash, fixed-income and equities in their portfolios.
"I see portfolios in the 75 to 90 per cent equity allocation. That's brutal because when you actually do the real investor profile, most people are somewhere between 40 and 60 per cent as far as a comfort level in equities is concerned. It's a far cry from what they come in with. Most people don't really realize what they have."
Croft said her firm has reduced its equity weighting and put proceeds into cash "because bonds are overvalued at these levels and we could see negative returns in equities as the fundamentals are beginning to deteriorate."
And because of the rising Canadian dollar and deteriorating American currency, she is shying away from the United States.
"We're overweight in Europe, Australia and the Far East and also overweight in Canada - although we have trimmed it back a bit.
Graham advises keeping one's portfolio at 50-50 stocks and bonds, or as high as 55-45 as gains become elusive.
"Next year, zero to five per cent (returns) perhaps," keeping in mind the respectable gains of the last two years. We're up 40, 50 per cent since then - that's been a pretty decent bull market run."
He also cautions against being stuck with a long-term, fixed-income securities and advises sticking to short maturities - "two, three, four-year stuff."
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