Maybe without realizing it, a lot of investors bought themselves some insurance against the big recent drop in Valeant Pharmaceuticals stock.
Valeant (VRX-T) is one of the largest stocks in Canada as measured by market capitalization, and it has been a spectacular long-term performer with a cumulative five-year gain of 744 per cent. Valeant's rise has been a significant source of strength to an otherwise weak Canadian stock market, but that's over for the moment. The company's shares have plunged almost 27 per cent for the month to Sept. 28 as a result of criticism the company has faced from U.S. lawmakers about its drug price increases.
The investors who bought insurance against this reversal of fortune for Valeant didn't use anything complicated. They simply ramped up their exposure to international stock markets outside North America. As noted in a recent report from BMO ETFs, the firm's BMO MSCI EAFE Index ETF (ZEA-T) is the Canadian ETF with the largest net inflow to date this year. Long accused of having an outsized bias toward domestic stocks, Canadians have gone international in a big way.
It's serving them well, and not just because international markets are much more balanced in their exposure to all major stock market sectors. Canada is about two-thirds a financials and resources market, while the EAFE index has a 36-per-cent weighting to those areas. Canada's weak diversification extends to individual stocks as well. Valeant was briefly Canada's largest stock and it ranked third in late September with a weighting of 5.1 per cent in the S&P/TSX composite index. That's not colossally large, but it is big enough to help move the entire market when the stock makes a big run higher or lower. On Sept. 28, when the S&P/TSX composite index fell 2.8 per cent, Valeant fell 16 per cent.
We've seen this before, though much more dramatically. Nortel Networks was a market cap leader that carried and then dragged down the TSX. That's our stock market for you. Every so often, stocks some along that have a big influence on the benchmark index. Investing outside Canada is how you insure against damage to your portfolio when these stocks fall.
Rob Carrick