A closer look at the Canadian stock market’s lack of diversity

What are we looking for?

Portfolio managers with a Canadian mandate are often faced with a challenging task when it comes to investing client money. A primary reason is that properly diversifying in Canada is difficult because of the high concentration of stocks and market value in the energy and financial sectors. I take a more-in-depth look at the overall makeup of the Canadian equities market below.

The screen

I extracted all publicly traded equity instruments in Canada and then classified them in the 10 economic sectors. The screen returned about 2,600 companies after removing exchange-traded funds and most of the closed-end funds. The total market value of these firms is currently around $2,135-billion. I also screened the firms to compute the total amount of cash and debt carried on the balance sheet.

More about Thomson Reuters

Thomson Reuters (thomsonreuters.ca) delivers news and intelligent information to more than one billion people in 140 countries every day. Our content, software and technology support the way professionals work in a rapidly changing, ever-more-complex world. Thomson Reuters Eikon (thomsonreuterseikon.com) is the platform used by financial and corporate clients for top research, portfolio analytics, charting and screening for every asset class.

What did we find?

Using Thomson Reuters Eikon, I pulled some market statistics to show more data on the Canadian market. Energy and financial firms make up about a quarter of the total companies and more than half of the total market value. The top 25 and 50 companies make up more than 50 and 68 per cent of the total value of the Canadian market, respectively. The mining industry in the country makes up nearly half of all stocks outstanding, yet makes up only about 10 per cent of the market value.

On their balance sheets, Canadian companies are holding nearly $225-billion in cash currently, 75 per cent of which is concentrated in the largest 100 companies. On the other side of the ledger, these companies are carrying a debt burden of more than $1,400-billion.

Canada has 211 companies with a market cap of more than $1-billion, including Toronto-Dominion Bank and Royal Bank of Canada as the only two trading more than $100-billion.

In comparison, the U.S. market dwarfs Canada's with a market value of $24,864-billion (U.S.) and 1,800 companies above the billion-dollar mark, including 43 companies trading more than $100-billion.

To properly diversify, it is important for Canadian investors to have equity holdings outside their home country.

Charles Martin, CFA, works in the financial and risk unit of Thomson Reuters and specializes in asset management.