Is it 1999 or 1995 for tech stocks?

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Nervous investors see the dominance of technology stocks and point to the year 2000 as a potential analogue for imminent market disaster. BofA Securities global head of equity derivatives Benjamin Bowler admits there are some similarities between now and then but that market conditions are closer to 1995, when big gains were ahead for the next half decade.

Mr. Bowler emphasized that during the nine primary global asset bubbles since 1920, including Bitcoin in 2017 and gold in the 1980s, market volatility increased along with stock prices. He uses year over year changes in realized volatility, price fluctuations that actually occur over trailing one-month periods, rather than the CBOE Volatility (VIX) Index that gauges expected volatility using derivatives pricing.

Volatility rises during asset bubbles as prices diverge from fundamentally driven valuations. In current market conditions, volatility both for the overall market and for technology stocks themselves are at levels roughly one-third as high as the early 2000 peaks so not yet concerning.

Return dispersion – the extent that stock performance for each index constituent is similar to the benchmark – can also signal the imminent implosion of an asset bubble. In this case the signs are worrying. The narrowness of current market leadership, with only a few AI-related tech giants determining S&P 500 performance, has only been higher in 2007 and 1998. This was just before the U.S. real estate and 1990s tech bubbles burst respectively.

Mr. Bowler believes that the sheer size of the market-leading stocks will help prevent excessive valuations reminiscent of the late 1990s tech stocks. He notes that today’s tech behemoths are three times the size of those leading the internet bubble relative to U.S. GDP. The implication here is that the divisor in the price to earnings (PE ratio) equation is so huge that investors will have to work very hard to drive valuations up to Cisco Systems’ 400 times PE in 1999.

The crux of BofA’s argument is that realized volatility (which can be followed here on the Chicago Board Option Exchange site) is the most reliable indicator of an asset bubble and current levels are not sufficient to ring alarm bells. In addition, valuations for market-leading stocks remain vaguely attached to reality.

It is a generally agreed upon tenet of investing that market tops cannot be called with skill, only luck. At the same time, it is very difficult to argue that we are not witnessing the expansion of an AI-related bubble when Nvidia Corp. gains US$1-trillion in market cap – more than the entire value of Berkshire Hathaway – since the end of February.

Mr. Bowler is right to point out that the Nasdaq gained more than 80 per cent in both 1998 and 1999 so investors that sell AI-stocks now are risking a severe case of regret. Again, market tops can’t be called.

We are, I think, in for a bumpy ride in the coming years no matter what happens. All investors can do is keep a close eye on realized volatility and reduce risk when they have trouble sleeping at night.

– Scott Barlow, Globe and Mail market strategist

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Ask Globe Investor

When I look at the U.S.-listed version of a Canadian company, it almost always seems to be up more, or down less, than its Canadian-listed counterpart. Is this just my imagination? Are Canadian investors better off buying stocks of Canadian companies on a U.S. exchange?

No. I think it’s your imagination. A share of Royal Bank of Canada – or any other Canadian company – traded on a Canadian exchange is identical to a share of Royal Bank traded on a U.S. exchange. The only difference is that one is quoted in Canadian dollars and the other in U.S. dollars, so their market prices should reflect the Canada-U.S. exchange rate and nothing more.

If the exchange rate is fluctuating, the Canadian and U.S. prices of an interlisted stock won’t move in lockstep with each other. But if the exchange rate is stable, one would expect the price changes, on a percentage basis, to correlate highly with each other.

To test this hypothesis, I created two watchlists on, each consisting of the 10 largest Canadian-listed companies that also trade on a U.S. exchange. (In descending order of market capitalization, the largest interlisted companies are Royal Bank of Canada, Toronto-Dominion Bank, Canadian Natural Resources Ltd., Canadian National Railway Co., Enbridge Inc., Thomson Reuters Corp., Shopify Inc., Canadian Pacific Kansas City Ltd., Brookfield Corp. and Bank of Montreal.)

The first watchlist consisted of the companies’ Canadian tickers trading on the Toronto Stock Exchange in Canadian dollars. The second watchlist consisted of the respective U.S. tickers trading on the New York Stock Exchange in U.S. dollars. I then compared the daily percentage change for each pair of Canadian and U.S. tickers at the close of trading on Monday of this week, a day when the Canada-U.S. exchange rate was steady.

Result: In all cases, the daily changes for the Canadian- and U.S.-listed tickers of the same company were virtually identical. The average spread was just 0.07 percentage points, which is negligible. What’s more, in five of the 10 cases the Canadian ticker had a slightly larger percentage gain (or smaller percentage loss) than the U.S. ticker, while in the other five cases the U.S. ticker did slightly better on a relative basis. Again, these differences were minuscule.

So no, Canadian investors are not better off buying shares of Canadian companies on a U.S. exchange. In fact, they will be worse off, because they would have to first convert their Canadian dollars into U.S. dollars, and brokers build a hefty profit – typically 1 per cent to 2 per cent – into their buy and sell spreads. Bottom line: If you want to invest in a Canadian company, buy it in Canadian dollars on a Canadian exchange. One exception would be if you already have U.S. dollars to invest, in which case you could avoid currency conversion costs by buying the interlisted shares on a U.S. exchange and moving them over to the Canadian side of your account.

– John Heinzl

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