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PRINT EDITION
World Cup offers lessons for TSX: Past performance determines the winners
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By IAN MCGUGAN
  
  

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Thursday, June 14, 2018 – Page B1

As you may have heard, a certain international showdown involving men with strange haircuts and inflated egos begins on Thursday. If the 2018 edition of the World Cup runs true to form, it will involve dysfunctional teamwork, nationalistic fervour and, oh, yes, the Germans will win.

That, when you think about it, makes the tournament a near perfect metaphor for the global economy.

But the parallels between footie and finance run even deeper than that, according to Ian de Verteuil of CIBC World Markets. In a report this week, he points out lessons that apply equally well to both the World Cup and the Canadian stock market.

Start with the charming notion that everyone has a chance to win.

World Cup fans know this is just a fable you tell the children. Since the quadrennial event began in 1930, only a dozen countries have ever made the tournament's final game. A mere eight have won it. Brazil, with five titles, and Germany and Italy, each with four, are way ahead of everyone else.

Much the same concentration of winners appears if you look at the Canadian stock market. To see how various industries have performed over the long haul, Mr. de Verteuil begins by slicing and dicing the broad categories that make up the conventional classification of the S&P/TSX Composite. For instance, rather than simply tracking a broad financial segment, he splits the companies that are part of that sector into banks and non-banks.

Even with this finergrained approach, the market's results since 1990 are still dominated by only a handful of industries, he finds. "Banks and railroads have led the pack over the past 28 years - and fairly consistently," he writes. "We would expect that to continue over the long term."

A mere seven sectors in his classification system have produced compounded annual returns of more than 10 per cent since 1990. These industries - banks, railways, consumer staples, non-bank financials, pipelines and utilities, telecom and integrated energy producers - benefit from superior business models, high levels of profitability and a narrow list of legitimate competitors. Just as the World Cup has always been the property of a tiny cluster of countries, the Canadian market is dominated by this handful of long-running success stories.

You can draw parallels between each sector of the Canadian market and its World Cup analogue, Mr. de Verteuil says.

Banks, for instance, are the Germanys of the stock market. They're boring but consistent champions. Real estate is similar to Iceland in being relatively small and usually underestimated. Meanwhile, materials companies, such as base-metals miners and fertilizer producers, are akin to England - always convinced that winning is their destiny and almost always disappointed.

To be sure, these comparisons only hold true in the aggregate. As Mr. de Verteuil notes, individual superstars can appear in unlikely places. James Rodriguez of Colombia was the top goal scorer in the 2014 World Cup despite playing for a team that didn't even make the semi-final. In much the same way, it's possible that an individual pot company or tech superstar could defy the odds and enjoy a brilliant run on the Canadian stock market.

But people shouldn't bet too much on the possibility of a new champion appearing from out of nowhere. Most likely, the World Cup victor will be one of several well-known powerhouses. And most likely, the future champions of the Canadian stock market will continue to be the same sectors that have dominated performance in the past, Mr. de Verteuil argues.

"Too often investors believe in mean reversion - if something does well, it must do badly in the future," he writes. "By and large, this isn't true in the S&P/TSX and it isn't true in the World Cup."

Associated Graphic

The FIFA World Cup trophy sits on display in Moscow on Wednesday. Odds are that the tournament's champion will be a country that has won it before, just like how stock-market wins usually go to one of relatively few sectors.

SERGEI KARPUKHIN/REUTERS


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