Investors Head North

As the Dow and Nasdaq slow, Toronto stocks gain 23%

Canada's stock market has been the Rodney Dangerfield of the investment world. Canada boasts some of the world's top aerospace, telecom, and high-tech companies, but the Toronto Stock Exchange has never attracted much attention from U.S. investors.

Not anymore. The Toronto Stock Exchange 300 Composite Index is taking off--rising faster than any major benchmark index in the world (table). While the Dow Jones industrial average is off 7% and the Nasdaq Composite Index has tumbled 10% since January, the TSE 300 has climbed 23%.

So American investors are piling in, pumping up Toronto's market further. U.S. investors poured $17 billion into Canadian stocks in the first five months of this year, compared with $11 billion for all of 1999. By the end of 2000, a Canadian government agency estimates the figure will hit $40 billion. "The Canadian market is getting the recognition it deserves," says TSE Chairman Daniel F. Sullivan.

BIG HITTERS. Behind the market's surge is the explosive growth of Brampton (Ont.) communications-gear supplier Nortel Networks Corp. Even though its stock has come off its highs in recent days, it has soared 46% since January. The company accounts for roughly half of the TSE 300's gain as its market capitalization has risen to $213 billion from $132 billion in January. It makes up 33% of the TSE 300 index, which is weighted according to market cap. Other high-tech hitters include the Canadian portion of JDS Uniphase Corp. and Celestica Inc.

In fact, some brokers on Toronto's Wall Street--called Bay Street--joke that the TSE 300 should be called the TSE 1. "The change in the index on many days is entirely due to the movement of Nortel," says Wayne E. Deans, a partner at Deans Knight Capital Management Ltd. (The next-biggest firm in the TSE 300, Seagram Co., accounts for less than 3% of the index.)

Still, the TSE 300's steep climb is more than a one-star show. U.S. investors, who are the majority of non-Canadian investors, are discovering many undervalued jewels across their Northern border. Canada's economy is expanding at a brisk clip, with unemployment at a 24-year low and inflation below 2%. "They picked the U.S. market over pretty well and then were looking for other markets that were trading at better values," says Eric C. Tripp, executive managing director for institutional equity at BMO Nesbitt Burns.

Indeed, even without Nortel, the rest of the TSE 300 index would still be up 12%, a greater rise than any other global benchmark. With the exception of sectors such as metals and minerals, many Toronto Stock Exchange equities are experiencing double-digit growth, with oil and gas stocks up 21% and utilities gaining 12%.

What could halt this upward trajectory? A reversal in Canada's economic fundamentals. But right now, no indicators point downward. So Canada's TSE 300 should continue to fly-- unless Nortel takes a tumble.

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