A trader gestures in front of screens at the bourse in Madrid August 8, 2011. World stocks racked up more losses on Monday on deep-rooted jitters about the U.S. ratings cut, but signs the European Central Bank was buying Italian and Spanish debt gave some respite to battered bond markets.ANDREA COMAS
Buyers beware: everything's expensive, and profits don't come easy.
At least that's what investing feels like these days, particularly in Canada.
The root problem: anything that's remotely safe, or yield-oriented, has been exploited to the nines.
Consider these returns: the consumer staples sub-index of the Toronto Stock Exchange is up 20 per cent in the past year, while consumer discretionary stocks are up 16 per cent. The financials sub-index recently set a post-crisis peak, and telecom plays are up an average of 21 per cent.
And these industries are getting even more love because investors are dumping riskier mining plays to flee to supposedly safer pastures. Compounding the problem, energy and materials make up about 45 per cent of the Canadian equity market in normal times, so there are only so many 'safe' companies left to invest in.
In many cases, the earnings justify the sector valuations. The Globe's Scott Barlow took a look at consumer staples and found that the average price-to-earnings multiple in the sector today is just 16.1 times. Not exactly cheap, but certainly not wildly expensive.
And there are some standout resource plays, such as Tourmaline Oil Corp.
But there are two problems. Many of the appealing resource plays are already heavily bought. And at what point does profit-taking kick in for the star stocks?
At some point investors will look at all the money they've made and some will decide there's no reason to stick around for the unpredictable future. No one wants to be caught on the wrong side of that trade.
So maybe you'll look outside Canada. Good luck in the U.S. That market isn't nearly as resource-dependent, so the S&P 500 is still lingering around its recent record high. And good luck finding some blue chip U.S. companies that are pure play on their home market.
Like the prospects for U.S. autos? The big manufacturers are getting hammered in Europe. Like solid companies like McDonalds? Over half its revenue comes from outside the United States.
Two years ago, when the U.S. recovery was nascent, this was a good thing. Global earnings boosted profits. But now no one knows what's going to happen to emerging markets.
Which leads to the biggest question mark of all: China. As a friend – and sadly, a Montreal Canadiens fan – recently pointed out: look at all the scandals we have in North America, where we have the rule of law and securities regulation. At what point does China's black box blow up?
Plus, 25 years ago the Japanese economy was the shining star. And then it collapsed. At some point China risks a similar fate, albeit maybe -- hopefully! -- not as sharply.
The problem is that timing is everything in trading, and calling that reversal is almost impossible. Until then, I guess we've got REITs, right?
(Tim Kiladze is a Globe and Mail Reporter.)
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Tim Kiladze