Are emotions getting the better of your clients?

Franklin Templeton Investments Corp.’s latest national research has found that 39% of investors describe their investment personality as either suspicious or timid. Only 31% describe themselves as analytical, risk-taking or opportunistic. The survey of 1,020 Canadians was conducted during the week of Jan. 17 by Angus Reid Public Opinion.

It’s the fifth consecutive national survey we’ve done since 2009 that found negative sentiment among Canadian investors.

The pessimistic pattern is in stark contrast to market returns over the same period. In 2009 and 2010, the S&P/TSX composite index soared by more than 49% in value and is now only 11% below its record peak.

The markets have recovered dramatically, but investor confidence has not. It’s clear that emotions dictate action and, unfortunately, many Canadians have failed to seize the opportunity and invest in stocks at bargain prices.

Paradoxically, Canadians are bullish about the investment market’s growth prospects, the January survey found. When asked where we are at in the market cycle, the bulls outnumber the bears by more than three to one. Of those who have an opinion, 55% expect stock markets will rise, while only 16% believe markets will fall.

Emerging international markets such as China, Brazil and India were identified by 43% of respondents as representing the greatest investment opportunity in the next decade.

Fortunately, international markets present more potential upside for opportunistic investors. Although the S&P/TSX composite index is close to its record peak of 2008, there is considerable room to grow overseas.

The MSCI world index of 1,500 world stocks has rebounded since the market bottom of March 2009, climbing by about 47% in value over the past 22 months. However, that index must climb by another 38% in value to reach its record peak reached in 2007.

Similarly, the MSCI EAFE index, which measures the equities market performance of Europe, Australasia and the Far East, is up by about 44% in value since the March 2009 bottom but has another 49% to go to reach its record high of four years ago.

Think about it: the S&P/TSX is 11% below its peak; the MSCI is 38% below its peak; and MSCI EAFE index is 49% below its record high. Where is the best potential return?

Currency plays an important role, too. The Canadian dollar crossed the parity threshold with the U.S. dollar in the spring of 2010, and strong demand for commodities and a weak US$ have kept the two currencies neck and neck ever since.

The average value of the C$ for the past 30 years is about US83¢, far below parity but significantly higher than the January 2002 all-time low of US61.79¢. Future weakness in the loonie cannot be ruled out. A downturn in commodities markets, an economic slowdown in China or a strengthening US$ could push the C$ back to its 30-year average in short order.

A strong C$ means global equities are on sale. It’s a great time for your clients to increase their exposure to global stocks because they can buy foreign assets at a discount. IE



Don Reed is president and CEO of Toronto-based Franklin Templeton Investments Corp.