The exhilarating run that sent Canadian stocks soaring in early 2011 has made the second half of the year feel like a tragedy for many investors.
Here's a comforting reminder as New Year's Day approaches: you aren't the only one who feels a little empty when looking at your portfolio. The exhilarating run that sent Canadian stocks soaring in early 2011 has made the second half of the year feel like a tragedy for many investors.
Back in April, when the S&P/TSX Composite Index skyrocketed north of 14,000, it was liberating to forget the horrors of the financial crisis. Then came the reminders that the euro zone is still plagued with problems and U.S. growth is still sub par. From the April high until now, the TSX is down 16 per cent. The Vegas-like casino known as the Venture Exchange, home of riskier junior mining and energy stocks, has lost over a third of its value since January.
But while the markets are awash in heartbreak, some relationships have panned out. Just look at real estate investment trusts. If you happened to buy the sector when markets really got rocky in August, you would be curled up on your couch, cozy with your 15 per cent return. Pipelines, too, are feeling the love. Both Inter Pipeline Fund and Enbridge Inc. are up just over 30 per cent in the same period.
These surges serve as a reminder that investing can be a lot like Christmas shopping. When you have to buy a present for family members who already have everything, you turn to the old reliables. Slippers and earrings for mum, Laura Secord chocolates for Uncle Chris.
The same is true in the markets. With no income trusts to turn to, and with 10-year U.S. Treasuries yielding a paltry 2 per cent, good old dividend-paying stocks have become investors' default investment of choice.
Everyone and their auntie is now piling in – a rush that is viewed with alarm by some portfolio managers. "REIT valuations are silly," says Lorne Steinberg, head of Montreal's Lorne Steinberg Wealth Management. "There's no value left. [The sector]is very overvalued by any type of metric."
The same goes for pipelines, says market strategist Doug Rowat at Raymond James, referring to what he calls "indiscriminate buying" in the sector. Investors, he says, "have been piling into the space as if there's no risk there at all."
On an equal weighted, total-return basis, Canadian pipeline stocks are up more than 150 per cent in the past five years. The S&P/TSX Composite Index, by comparison, has popped only 10 per cent over the same period.
Sure, there's value in pipelines, Mr. Rowat says, but there's also risk. Just look at the political drama in the United States surrounding TransCanada's Keystone XL pipeline. You can't forget about aging infrastructure, either. One of Enbridge's biggest pipelines, he points out, was built over 50 years ago.
Don't despair if you're heavily weighted in these sectors. The good thing about Christmas is that Boxing Day always follows, sure to offer some deals.
Cautious investors should take a peek at Canadian telecom companies, Mr. Rowat suggests. The sector has been on a run, but with a price-earnings ratio of 16 times, it isn't wildly over-priced. It's certainly far cheaper than, say, Pembina Pipeline Corp. and Enbridge, which sport P/E ratios of 30 and 36 times, respectively.
More adventurous investors may want to take a gander at life insurers and materials stocks. The insurers have had it rough, but Mr. Steinberg thinks the management teams are solid enough to navigate the slow growth that has wreaked havoc on their annuity payouts. Sun Life Financial , for instance, recently announced plans to exit the U.S. life insurance market and pay more attention to potentially more lucrative areas. For now, insurance stocks offer solid payouts, with the S&P/TSX Composite Life and Health Insurance sub-index yielding 5.6 per cent.
For those who are hopeful about a global economic rebound, materials stocks might be the Boxing Day special of choice – especially shares that are tied to copper prices. Mr. Rowat's suggestion: Teck Resources Ltd. The stock is down a whopping 42 per cent for the year, but the debt problems that stemmed from its takeover of Fording Canadian Coal are now under control, and the stock is very cheap if you expect market sentiment to rebound.
These names, of course, are just suggestions. But they help to drive home a couple of key points: don't feel so confined in your investing, and don't follow the crowds. Mr. Steinberg promotes a Bob Dylan-style of investing. "The first one now will later be last, the times they are a changing."
Tim Kiladze