From Saturday’s Globe and Mail
So the Swiss are better than us. Well, goody for them. But the question for investors is whether the Swiss knack for innovation translates into remarkable stock market gains.
It should. After all, innovation gives companies an edge over their competitors, and that should lead to solid market share and fat profit margins. Unfortunately, this doesn’t seem to be the case.
Victorinox AG is a closely held company, meaning that you can’t invest in it through the stock market or track its interest among investors. But you can track the Swiss Market Index, which represents the country’s 20 largest stocks: Its performance has been lagging Canada’s benchmark index by a substantial margin.
Over the past one-year, three-year and five-year periods, the S&P/TSX composite index has consistently outperformed the Swiss index. Over the past decade, the Canadian index has risen a total 49 per cent after factoring in dividends, while the Swiss index has risen a mere 1 per cent.
Why? This isn’t a strike against innovation, but rather an indication that there might be bigger factors at work when it comes to driving stock prices – like, uh, luck and commodities.
For example, Swiss financial firms were dealt severe setbacks during the financial crisis, which translated into massive writedowns and quarterly losses. UBS AG shares remain 76-per-cent below their pre-crisis highs, and Julius Baer Group Ltd. shares are still down 52 per cent.
By comparison, Canadian banks largely escaped the carnage. The worst hit, Canadian Imperial Bank of Commerce, is down a relatively mild 28 per cent from its pre-crisis high, while Toronto-Dominion Bank is down all of 2 per cent.
Meanwhile, it’s hard to duck the fact that higher prices for crude oil, gold and fertilizer have helped drive triple-digit gains for Canada’s energy and materials sectors, which together represent nearly half of the composite index in terms of their weighting.
One of Switzerland’s big commodity plays is Transocean Ltd., owner of the oil rig that exploded in the Gulf of Mexico last April and created the massive oil spill. Needless to say, its shares aren’t doing well.
In other words, apparently Canada hasn’t needed tremendous innovation to lift its stock market, or generate employment and economic growth. The downside is that without a need for innovation, there is unlikely to be any.
The upside: Investors can do very well without it.