The Case For Global Diversification

Up until the beginning of July, the Canadian market was the best performing market in the world and the only one with positive returns. Many clients wondered why we had recommended International holdings which were down 20+ percent year over year.

After all, experts predicted oil was going to $200/barrel and gold and other base metals were going to provide the foundation for positive growth against the rest of the world for years to come. How things change in a month. Oil stocks are in a technical bear market down over 20% from their highs less than 2 months ago.

Potash Corporation dropped almost 13% today contributing to 1/3 of the TSX’s drop on the day. Goldcorp was down over 9%. With financials and energy stocks representing almost 75% of the market, there isn’t adequate diversification in the Canadian market.

The unwinding of commodities will have Canada lagging almost all other markets over the near term. Pharmaceuticals, technology, along with telecom and cable stocks are showing strength yet Canada has limited exposure.

These are sectors to consider during this period as many are still cautious about the strength of financials. During these times, Canadian investors can benefit in two ways. One is the potential outperformance of International markets. The second is the decline of the Canadian dollar relative to other non-commodity based currencies. The Dow Jones Industrial Average was up almost 3% on the day. Add the lowering of the Canadian dollar and you have a substantial 4% increase in the market.

So what is the best way to play the global markets? In past posts, I talked about the benefits of fundamental indexing which over the long-term seems to outperform indexes around the world and provides returns that exceed most active managers.

I have provided a link to our website page that discusses fundamental indexing and the methodology behind it.

http://rothenbergcapitalmanagement.com/index.php?id=188

What are your thoughts on this? Do you believe that global markets will outperform Canada in the months ahead?

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