Skip to content
Join our Newsletter

Resource stocks to the rescue of bursting B.C. real estate bubbles

My father was born in Vancouver in 1930 and was raised in the city he loved. Until recently, Vancouver and Canada as a whole have suffered from the same affliction: having an economy that is dependent on the commodity cycle.
robthompson

My father was born in Vancouver in 1930 and was raised in the city he loved. Until recently, Vancouver and Canada as a whole have suffered from the same affliction: having an economy that is dependent on the commodity cycle.

This cyclicality can cause planning issues when an individual is constantly worried about how to take care of a family. He finally left in 1960, going to California where things were booming. Vancouver doesn’t suffer from this correlation to the commodity market these days, but for all of us it’s important to take a step back and look at the long-term picture of how the Canadian stock market has done, which is somewhat dependent on resources.

First of all, realize that markets generally revert to the mean over time. In other words, bull markets create bear markets and bear markets create bull markets. According to the 2017 Morningstar Andex Chart, the Canadian stock market has shown a 9.8% annualized return since 1950. This number is unbelievable to many because we get caught up in the latest economic problems, trade wars or any other event that can take our eyes off the ball, which is retiring with an adequate amount of money. It’s an emotional roller-coaster out there, but one that people can overcome with a little help in the behavioural finance department.

In the last few years, we have been saved in Vancouver by a roaring real estate market, but in case you haven’t noticed, the resource market, in contrast, has been terrible. This means that the Toronto Stock Exchange (TSX) has had a poor showing over the last 10 years since its peak in April 2008. It has had a compound price return of less than 1% per year since the spring of 2008. If this sounds lousy, it’s because it is.

Let’s delve deeper into this Andex chart though. All we hear about is how the U.S. market is doing so well, but from August 2000 to February 2013, the U.S. market as measured by the S&P 500 showed zero return. That’s quite painful to deal with. Unfortunately in 2012, many investors were racing to get into the hot Canadian market – exiting the U.S. market at exactly the wrong time. As usual, performance chasers got it wrong.

Back in 1960 when my dad left Vancouver, we had just come off a North American recession, and things didn’t look great. As they say, when the U.S. sneezes, Canada catches a cold. Markets were in the middle of a correction. John Diefenbaker was prime minister, the Avro Arrow was cancelled and Dwight Eisenhower was president of the United States. In 1950, when the data set starts, there were about 13.7 million people in Canada and only 7.8% of the population was over 65, while the male life expectancy was 66 years old. Oil was $2.50 a barrel and unemployment was 2.4%. The minimum wage was $1 in 1965 under prime minister Lester Pearson, and Vietnam was a going concern later in the 1960s.

With all the inflation, wars, political upheavals and other “important events of the day,” the Canadian stock market has still risen almost 10% a year since 1950. Recently, the TSX has been significantly below the long-term average, and if you believe in reversion to the mean, it should outperform over the next few years.

At a time when everyone is racing to buy into the U.S. market, maybe we should be looking north on a relative basis. Commodities haven’t been this cheap in relation to equities since the tech bubble in 1999. Does this sound familiar with the FAANG (Facebook, Amazon, Apple, Netflix, Google) stock surge today?

Before that, it was 1971 that commodities were this cheap relatively. Each of those times we saw a major increase in commodities versus equities. Reversion to the mean tells us this should happen. If my bet is right, Vancouver may be saved from the coming real estate fall by a mining market that once again gets the city excited. It may be the mining types, not the real estate developers, buying the Porsches and west-side houses again. The Investec Mining Clock tells us this, but that’s a story for another day. •

Bob Thompson is a financial adviser with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.