TSX

The S&P Composite TSX index hasn’t stopped climbing in the last few months. It started the year just above 10 000 and is now hovering around 13 500, having just peaked a few weeks ago at 14,216. It doing so, it has significantly outperformed other major stock exchange indexes including the Dow Jones, Nasdaq, FTSE 100 and Nikkei.

These are indeed pretty sweet number for the Bay Street world, but they’ll also dangerously deceiving when it comes to measuring the overall value and healthiness of the exchange.

To get a more accurate idea of the direction towards which the TSX is heading in terms of competitiveness and size, we must look much farther that the simple S&P Composite index, which while being a useful tool, only provides us with a small part of the picture.

First and foremost, the index’s rise is almost solely due to the rise in value of Oil and Gas firms, which is itself directly correlated to the price of oil. Put it this way, if they have another major hurricane in the Gulf of Mexico which destroys a few refineries thus sending the price of oil skyrocketing, we can bet on the index gaining 250 points in an hour. This can look nice on paper, but is hardly a proof of an exchange’s strength.

Another key indicator of an exchange’s heath is its diversity, and most notably the diversity of its largest firms. Here’s an alarming statistic: in the year 2000, at the height of the high-tech boom, the ten most capitalised companies in the TSX were in telecommunications, oil and gas, mining, transportation and financials. With BCE up for grabs, we can be fairly certain that by the end of the year, the top ten will all be in either finance (banking or insurance) or Oil and Gas. Contrast that with an exchange like London where the ten most capitalised companies are currently in Oil and Gas, banking, pharmaceuticals, mining and telecommunications. This may not seem like such a big deal at the moment, but I can assure you it’s dangerous for a country’s main exchange to be reliant on two or three industries.

We should also remember the importance of flagship industries. Every exchange has them. For instance, the Paris Stock Exchange, now merged with other European partners to form Euronext, has always been the place to raise capital in the fashion and cosmetics industry. The TSX’s flagship indursty has always been mining. It’s used to attract major minors from all around the world, and had its own set of respected major Canadian miners such as Inco, Alcan, Dofasco, Falcongridge and you name them. Nowadays, with both Alcan and Stelco likely to be taken over by foreign firms, the only major Canadian mining company left seems to be BarrickGold. The TSX’s supremacy in the industry is also following suit and losing major ground to emerging markets such as Hong Kong, Sydney and most notably London.

To make matters worse, Toronto is also behind in the race to forging new alliances. Just this past year, we’ve seen New-York merge with Euronext, London team-up with Singapore, and the Nasdaq try to acquire London. Even the Montreal Exchange has gone looking south of the border for partners and settled on a 34% stake in the Boston Options Exchange. And Toronto? They’re considering their options.

So next time you read the paper and see a big green number with an arrow pointing upwards beside the S&P Composite TSX index’s symbol, don’ be fooled!