Since there ain’t no such thing as a free lunch, investing in Canada does involve some risks:
- The Canadian market is dominated by the finance and resources sectors. The risks of concentration in these two sectors can be seen from the performance of the Canadian market in October. The brutal correction in the energy sector (down 13%) dragged down the TSX to a 5.7% loss in just one month.
- The forward P/E of the Canadian market is 14.5, just a little less than the more diversified US market (P/E of 14.6). And as a Globe and Mail column points out today, many Canadian securities are trading at high valuations (Bank of Nova Scotia is trading at 13 times 2006 earnings, whereas Bank of America, Citigroup and Washington Mutual are all trading at less than 11 times).
- While the loonie has appreciated sharply over the past three years and many forecasters are calling par with the USD, but the loonie can also depreciate (like it did for most of the nineties).
- Foreign investors are piling into Canadian securities (again as the Globe and Mail column points out) and Canadian investors are pulling money out of US equities to invest at home. Is there a better contrarian indicator to hold off any investments for now?