I remember noting last quarter how challenging it was for non-US investors. Apparently, the damage was not done with the US playing catch-up in the fourth quarter. The fourth quarter was one of the worst quarters in my working memory. The decline was fast, and liquidity proved very challenging.

The tale of the tape can be seen on the table below:

There were few places to hide in 2018 with almost every major asset class ending the year in negative territory. Canada was no exception, with the S&P/TSX down -8.9% and the S&P/TSX Small Cap index -18.2% and the S&P/TSX Venture off -34.50%. What is of note over the last number of years is Canada’s underperformance. After posting significant returns in 2009, the Canadian equity markets have struggled to keep up with other markets. Since 2012, the S&P 500 annualized returns are +17.5%, while the Russel 3000 Index is up +17.3%. Over that same time period the annualized returns for the S&P/TSX is +5.7%, the TSX Small Cap +0.5%, and the TSX Venture is down -13.1%.

From the above analysis, I think we can agree that Canadian equities markets have not kept up with their US peers or benefitted from the last seven years of economic expansion. Several overriding influences have compounded to create Canadian small cap weakness. The strength of the US dollar has put pressure on commodity prices. The Canadian market being commodity centric has suffered as a result. Additionally, there has been a steady outflow of capital from Canada to the rest of the world. This has not just been foreign capital reallocating, but we have seen domestic funds shifting their equity weight away from Canada. A third headwind that has had a large influence on small cap stocks is the move to passive and ETF investing. This move away from active management has created liquidity challenges for small cap investors, as well as financing challenges for the underlying companies (as ETF’s do not typically participate in treasury offerings). These general headwinds are not the only factors creating recent underperformance but were strong contributors.