The Toronto Stock Exchange (TSX) is dominated by three sectors and that can affect stock choices especially if an investor is seeking growth stocks. Financials, energy and materials make up over two-thirds of the stock traded on TSX. All three sectors are facing larger economic conditions that are causing problems for relevant stocks. While growth investors are still finding opportunities via TSX the dominance of these sectors does limit the possibilities.
The importance of dominant sectors
In a recent discussion of stock picks trading on the Toronto Stock Exchange an analyst pointed to one of the biggest problems facing growth investors picking Canadian stocks. TSX is dominated by financials, energy, and materials which make up over two-thirds of the exchange’s traded stocks. This situation affects options for growth traders in very basic ways.
If one is picking individual stocks, sector difficulties are not always a problem for the company but may still affect the stock price. An individual company that is outperforming may take a hit when the sector as a whole is affected by news that affects the most well-known companies in that sector. While such situations can create buying opportunities for disregarded stocks whose fundamentals are strong, a languishing sector has a downward effect just as the reverse can be true.
As stock traders are well aware, the sentiment often overrides logic and stocks across sectors can be affected by negative sentiment. Given that TSX is so strongly composed of the financials, materials and energy sectors, their overall performance is important for sentiment. And that can mean growth stocks in other sectors can also be affected negatively by trouble in these crucial sectors.
Financials face rising interest rates
Financial sector stocks include a variety of companies providing financial services to both businesses and individuals. Though there are subsectors and groups of companies that outperform, financials are typically lower growth companies that can be depended on for the long-term. This situation may please value investors and the risk-averse but it can lead to disappointment for those seeking growth.
Financials do best when interest rates are low. But currently interest rates in Canada, as well as the U.S., are on the rise and that negatively affects financials across the board.
Materials and energy see ups and downs
The materials sector, sometimes dubbed basic materials, includes the mining and processing of raw materials. This sector can also include chemical manufacturers and crosses over with the energy sector but excludes jewelers, for example, as users of basic materials. Though there have been some bright spots for materials the overall weakness of the Canadian housing market has had a negative effect on both materials and financials.
Energy sector opportunities are many due to the inclusion of solar and other forms of emerging energy sources. But oil and gas still dominate and that leads to fluctuations in the sector. While long terms prospects for Canadian gas and oil are relatively positive, prices have been down and drilling is expected to decline in the coming year.
So what’s a growth investor to do?
Given the conditions that are working against the above sectors, there are a number of approaches one can take in evaluating growth stocks. The historical performance of the stock is always important but one might also consider how the stock has fared when the overall sector is down. Fundamentals are also a basic consideration but how do the fundamentals look in setting the stage for the next 10 years? And, finally, how do the next 10 years look for the overall sector? Macroeconomic conditions can be hard to predict but larger trends can be seen that are likely to affect particular sectors and the opportunities for growth stocks to move forward.
(Featured image by nodomain.cc via Wikimedia Commons. CC BY 2.0.)
