On the surface yesterday’s news was all about people losing their jobs. Looking beyond this harsh reality one could rightly surmise that home bias is subtly creeping into the discussion about Canada’s biggest banks.
Deep in Bloomberg’s coverage about the 1,500 job cuts was a very interesting quote from Ian Nakamoto, director of research at MacDougall, MacDougall & MacTier. Nakamoto stated about Scotiabank, “… the stock has been pretty weak versus the other banks. It’s because of their exposure to emerging markets. It just seems that investors want to invest in companies that have exposure to Canada and the U.S. and anything else, less so.”
Let’s face it, emerging markets haven’t fared so well in 2014. For example, the iShares Latin America Index ETF is up 2% year-to-date through November 3 compared to 9.3% for the iShares Core S&P/TSX Capped Composite Index ETF. The seven-point difference is enough to scare investors off emerging indefinitely.
But then add in the problems Scotiabank faces in Latin America – operates in 11 different countries with a focus on Peru, Chile, Colombia and Mexico – and you can’t blame investors for looking past it to other Canadian banks that aren’t doing business (or a lot of it, anyway) in emerging markets.
As Nakamoto reminds us, there are a number of options when it comes to the big banks that don’t have nearly the exposure to emerging markets as Scotiabank does. Chief among them is CIBC which generates the lion’s share of its revenue here in Canada.
The problem with this philosophy is Canadian’s are already predisposed to home-country bias; cherry-picking only exacerbates the issue. In September Morningstar’s Rudy Luukko interviewed Paul Bosse, a Vanguard executive from the U.S. In it Bosse highlighted several points about the Canadian market including the oft forgotten reality that Canada represents just 5% of the world market cap.
Running away from this reality just because emerging markets generally and Scotiabank specifically aren’t exactly firing on all cylinders is not the answer. Investors, thanks to an extreme home-country bias, are crawling deeper into the buxom of a very limited Canadian stock market.
The results of this short-term thinking could be lower future returns.
Let’s face it, emerging markets haven’t fared so well in 2014. For example, the iShares Latin America Index ETF is up 2% year-to-date through November 3 compared to 9.3% for the iShares Core S&P/TSX Capped Composite Index ETF. The seven-point difference is enough to scare investors off emerging indefinitely.
But then add in the problems Scotiabank faces in Latin America – operates in 11 different countries with a focus on Peru, Chile, Colombia and Mexico – and you can’t blame investors for looking past it to other Canadian banks that aren’t doing business (or a lot of it, anyway) in emerging markets.
As Nakamoto reminds us, there are a number of options when it comes to the big banks that don’t have nearly the exposure to emerging markets as Scotiabank does. Chief among them is CIBC which generates the lion’s share of its revenue here in Canada.
The problem with this philosophy is Canadian’s are already predisposed to home-country bias; cherry-picking only exacerbates the issue. In September Morningstar’s Rudy Luukko interviewed Paul Bosse, a Vanguard executive from the U.S. In it Bosse highlighted several points about the Canadian market including the oft forgotten reality that Canada represents just 5% of the world market cap.
Running away from this reality just because emerging markets generally and Scotiabank specifically aren’t exactly firing on all cylinders is not the answer. Investors, thanks to an extreme home-country bias, are crawling deeper into the buxom of a very limited Canadian stock market.
The results of this short-term thinking could be lower future returns.
