BUSINESS

European crisis forces Canadian investors to endure another roller coaster ride

05/17/2012 12:12 EDT | Updated 07/17/2012 05:12 EDT
MONTREAL - Here we go again.

Canadian investors are enduring another white-knuckled roller coaster ride as markets feel the pinch from Europe’s economic turmoil.

The situation may not be as devastating to Canada as the 2008-2009 financial crisis, but the value of individual investments are being hurt, prompting people to make rash and often unwise decisions.

The S&P/TSX Composite index has dropped nearly 19 per cent since its February peak, including eight per cent in May. Falling commodity prices have pushed the Canadian dollar down below parity.

The threats are not likely going to end any time soon as fears mount that problems in Greece could spread to Portugal or Spain.

"In the meantime you certainly want to be in preservation of capital mode in this type of environment so you have to be extremely careful," says Stefane Marion, chief financial economist at the National Bank of Canada.

While it's unclear how far markets will fall, the situation is very different from a few years ago. Canada’s credit markets continue to function well, corporate profits are good, and the growing U.S. and emerging economies are important counterweights.

"So you have to make a leap of faith right now that the Europeans will get it right this time around, but they've tried it many times before," he said.

Eric Lascelles, chief economist at RBC Global Asset Management, said he wouldn't be shocked if markets remained concerned with Europe for weeks and perhaps months.

But the long-term prospects remain bright.

"We still think there's all sorts of promising opportunities in financial markets over the long haul and really the best way to cultivate your portfolio is to take the long view as opposed to being too caught up in the short-term developments."

For the majority of investors, "sticking to your knitting" is the best course of action, added Lascelles, who predicts the European crisis will likely be "fairly benign."

He doesn't foresee a default by any major European country, big bank failures or the eurozone breaking apart.

"The underlining problems are chronic as opposed to fatal," he said in an interview.

The economic consequences should be more moderate and manageable and are unlikely to translate into a Canadian recession.

Unfortunately, history shows that retail investors often react to such big challenges by making the wrong move at exactly the wrong time, he said.

"So it's probably better to do nothing as opposed to making hasty actions in the current context."

With bond yields so low, Lascelles says normal asset allocations among equities, cash and fixed assets is the best strategy for the future.

"Diversification is the key," said Adrian Mastracci, portfolio manager at Vancouver-based KCM Wealth Management.

"It doesn't work totally well every time but it's still the best free lunch you've got."

He advocates adopting a defensive strategy by focusing on your portfolio instead of on markets that are beyond an individual's control.

"A prudent mix of assets is essential for your nest egg to keep swimming during stormy times," he added.

Instead of "running for the door" by selling stocks, investors should adjust their portfolios to mitigate risk while preparing to take advantage of great buying opportunities that will eventually surface, said Andrew Busch, global currency and public policy strategist at BMO Capital Markets.

Busch said investors should stick to their game plans that reflect their age, investment horizon and risk tolerance.

For some, that may mean switching from risk-free assets such as U.S. treasuries that generate very low yields and will lose value over the next two to five years.

Assuming Europe avoids financial "Armageddon," investors should examine equities in countries that are growing along with dividend-paying stocks in stable Canadian companies.

They should also hold cash to take advantage of buying opportunities and to avoid a possible larger economic shock, added Chris Kuflik, associate director wealth management at Scotia McLeod.

"There are times where cash is king and right now, with all the uncertainty, it's not a bad idea to have some cash levels in case we do get a bigger shock like we've seen in the spring in the last couple of years."

Kuflik also likes dividend-paying stocks but said not all such stocks are created equal. Favoured companies shouldn't be paying out too much of the cash flow and have the ability to avoid being hit by a more severe downturn.

The Canadian oil and gas sector remains strong, as are Canadian banks. Their prices have come down and they have attractive earnings growth as long as they aren't too heavily dependent on capital markets for generating earnings, he said.

U.S. investments in the health-care and broader technology sectors are also recommended, along with ETFs that focus on Chinese consumers.

Good sectors include banks, insurers, energy and REITs. Preferred shares are also good investment bets, but avoid small growth companies.