Gold and Tech: Darlings of the Market

Just because gold and tech stocks have done well lately, doesn't mean they'll do well in downturns

Ian Tam, CFA 16 July, 2020 | 1:54AM
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Ian Tam: As we move into the second half of a fairly tumultuous year, let's have a look at what's happened so far in the Canadian equity market.

Here's the performance of various TSX sectors since their peak in February. Since the pandemic hit, only 2 of the 11 sectors have bounced back to their peak values. The first is the basic materials sector highlighted by the thick turquoise line. This sector outperformance is owed partially due to the flight to safety behaviour of investors piling into gold producers. The second is the technology sector highlighted by the thick pink line. In Canada, this sector is largely composed of the tech giant Shopify which has done exceedingly well this year posting gains exceeding 160% on a year-to-date basis and now it's competing against RBC to be Canada's largest company by market cap.

These two sectors make up about 25% of the S&P/TSX Composite. Financials and energy, two other large contributors to the index performance, have yet to recover to their pre-COVID levels. However, six months of performance is not enough to gauge sector performance. For conservative long-term investors, it's often useful to consider what happened over a full market cycle including the financial crisis of 2008 and 2009.

Although basic materials and the technology sector both seem to be darlings right now, both sectors have had a pretty rough ride since the financial crisis of '08. An effective way to gauge the amount of risk tied to these sectors is to measure the volatility or fluctuations within the sector over a long time-period.

Here are some key risk metrics. In the second column, you will see a measure called standard deviation which essentially captures the fluctuation in the sector over the last 15 years. The lower the number, the more steady the sector. The third column outlines the maximum drawdown, or the largest amount lost from peak to trough over the last 15 years. This measure can be an intuitive gut check to help you understand whether you are able to stomach the losses attributed to a given sector.

So, before you pile into the hot sectors like technology and gold, perhaps it's worthwhile to take a step back and understand what the risk characteristics of those sectors have been in the past. Remember that the closer you are to retirement, the less risk you can afford to take.

For Morningstar, I'm Ian Tam.

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Ian Tam, CFA  is Investment Specialist at Morningstar Canada. 


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