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It was another gut-wrenching week for investors as global equity markets gyrated wildly and posted heavy losses. The blue-chip Dow Jones Industrial Average has lost nearly 8% over six trading days, amid concerns about inflation and rising interest rates

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Saturday, February 10, 2018 – Page B1

Dead last: As Canadian stocks lag, long-term returns prove paltry The stock-market correction was made in America, then promptly exported to Canada.

Overheated U.S. stocks were the starting point for a week of unnerving market tumult, which quickly turned into an indiscriminate global sell-off sparing no major market.

Canadian stocks were hardly due for a major slump, but were punished regardless in a return to an unwelcome but familiar form.

Already badly trailing the rest of the world, the latest setback in domestic equities has dragged the S&P/TSX composite index into negative territory since the precrisis peak nearly 10 years ago.

Not counting dividends, the main Canadian benchmark is now trading below its 2008 peak just prior to the onset of the global financial crisis.

As the U.S. stock market was transformed into a madhouse of volatility, the cross-border transmission of fear has dragged the S&P/TSX composite down by 5.2 per cent over the past week or so.

For Canadian investors, it has been a smoother, slightly shallower decline, as the domestic losses haven't been quite so drastic, and the swings in U.S. benchmarks not quite so violent here.

But Canadian stocks may have been less vulnerable to a correction simply because they lagged so badly up to that point, sitting out what has been a powerful uptrend in stock prices almost everywhere but here.

In Canada, there was "less to correct," said Craig Jerusalim, portfolio manager at CIBC Asset Management. "Valuations in the U.S. just got ahead of themselves."

Canada didn't really have that problem.

And yet, investors with a decent share of their wealth tied up in domestic equities would happily suffer through a steeper correction if it meant keeping pace with the rest of the world on the upside. Over the past year, the S&P/TSX composite index was the single-worst national index in the developed world. Down by 4 per cent in 12 months, domestic returns stand in glaring contrast to the gain in the S&P 500 index of 14 per cent over that time, even after accounting for the first correction in U.S. stocks in two years.

Whereas the United States still has a long way to go before it's in negative territory over the past 12 months, the relatively modest Canadian downturn was sufficient to wipe out all of last year's returns and then some.

Of course, there is no telling how long the current sell-off might last and where U.S. stocks will stand by the end of it. The thunderous return of volatility has the market flailing wildly and lopping off stock market value by the trillions with frightening speed. But the truth is, the Canadian stock market has been a dog for a very long time now.

For the past seven years or so, domestic stocks have been dramatically outclassed by their U.S. counterparts. There are very few major national indexes globally, in fact, that have fared worse than the S&P/TSX composite index over that time.

The main Canadian benchmark is trading below cyclical peaks set in 2008, 2014 and 2017.

Factoring in dividends does boost investor annual returns into positive territory, at about 3.9 per cent over the past 10 years. But the S&P 500 posted annual total returns of 9.8 per cent over the same time.

The problem is not necessarily an economic one. Through most of those years of domestic equity weakness, the Canadian economy has performed admirably.

From the ashes of the global financial crisis emerged an era of Canadian exceptionalism. Our banks were the envy of the world, having passed on the kind of risky lending pervasive in U.S. finance.

Our superior global standing was reinforced when the United States was stripped of its AAA credit rating in 2011, around the time sovereign debt concerns were spreading throughout Europe. Even last year, Canada had the highest growth of the G7 countries.

But the economy and the stock market are two different things.

And the latter seems forever defined by its simultaneous blessing and burden - resource concentration. "Any time commodity prices are strong and the Canadian dollar is strong, you're probably going to see Canadian stocks outperform," said Dan Bortolotti, a financial author and associate portfolio manager at PWL Capital in Toronto.

The opposite is also true - weak or declining commodity prices, above all else, tend to dictate equity performance. Looking at the past three decades of TSX performance shows Canada's best years were clearly the 2000s.

"Back then, everybody was saying, 'This is Canada's time, this is where the growth is, why even invest outside our borders,' " Mr. Bortolotti said. Not surprisingly, that decade was also an era of booming commodity prices, fuelled by the rise of the Chinese economy. On either side of the 2000s, however, resource weakness translated into Canadian stocks underperforming U.S.

stocks for extended periods. In 2011, the global resource boom ran out of steam, and prices tipped into a long downslide, which gained momentum when the global oil glut crushed energy prices starting in 2014. Investor preferences also shifted toward growth stocks, making U.S. technology and health-care among the hottest sectors, which are poorly represented in the Canadian stock market, where resources, even after an eight-year slide in prices, still account for at least 30 per cent of the value of Canadian stocks in total.

"It's still a disproportionately large resource sector compared to what the Canadian economy produces," Mr. Jerusalim said.

"There's still a very big gap."

Huh? How did I get here?
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