Insights & Market Outlook

Market Cap

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We have a problem!

We’re only two months into 2024 and already the year has provided interesting perspectives on the importance of portfolio construction and diversification.

First let me restate my bias:  the real portfolio benchmark is performance relative to a clear plan that outlines the purpose of the money.  This perspective takes us outside the daily drama of the markets with the focus on what really matters.

With that said, being a fun guy, I am staring at my market terminal on a pleasant Saturday and wanted to share some insights that I think are interesting.  The U.S. market has been red hot with incredible momentum: year to date the performance of the S&P 500 is 6.69%.  This compares with the TSX composite at 2.17% YTD. The 1-year numbers are even more staggering, with the S&P500 performance at 26.83% and the TSX at 6.07%.

How can there be such a profound difference between these two countries?  The answer lies in the composition of our markets and the incredible innovation in the U.S.   For example, there has been tremendous innovation in artificial intelligence and these developments have driven the present valuation of technology companies. Where are these companies located? Almost all of them are in the United States.

I am not suggesting that U.S. technology companies are good investments based on present valuation – I am making the point that the reason for the present valuation is simply the difference in innovation and the companies that drive progress between Canada and the U.S.  As an example, there have been many articles written about NVIDIA.   This company has dominant market share for AI chips.  The market capitalization of this U.S. company increased by $1T (US) in 8 months!

A look at the market capitalization of the top 10 companies in Canada and U.S. further illustrates the innovation gap. In Canada, the market cap of our top 10 companies combined is $1.1Trillion.  The market cap of the top 10 companies in the U.S. is $21.3Trillion (CAD).  Based on the difference in our population, Canada’s market cap for our top 10 companies should comparably be roughly $11Trillion, not $1.1. Further fun fact: our 10 largest companies combined would rank 7th in the U.S. top 10 company ranking.

The composition of each country’s top 10 companies by market cap is even more interesting. In Canada, the largest company by far is Royal Bank with a market cap of $187B followed by TD with a market cap of $146B, with 4 banks in total on that list. Those four banks represent a whopping 43% of the top 10 companies’ market capitalization!  In contrast, in the United States, there is not one bank in the top 10 largest company list!  We have excellent banks in Canada – but – I don’t think we expect them to be the hub of our progress in innovation.

In my view, the financial performance of our markets this year illustrates the urgent need to increase innovation in Canada. The investment portfolios of Canadians of all ages require broad and global diversification.

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