2005 RETROSPECTIVE

What a year!

At the beginning of 2005 very few pundits, if any, were forecasting a TSX Total Return of just over 24% following 2004's 15% return. Income Trusts, now integrating with the TSX Index, also defied gravity posting a second year total return over 28% (CIBC W M Total Return) despite some interference in the last quarter.

The bond market posted better than expected returns as well. The S&P TSX Canadian Bond Index finished the year with an all-in return of close to 7% down from just over7% in 2004. Cash returns increased modestly to 2.3% from 2.1% based on the 1-month bill rate.

International investors in Canada were not so fortunate last year. The US S&P 500 increased 3% which was entirely offset by the strength in the Canadian dollar which appreciated by the same amount. The MSCI EAFE (European, Asian and Far East) Index advance 14% in US dollars, 11% in Canadian dollars. Generally, Canadian investors were better off in Canadian investments.

Just what drove these stellar domestic returns?

It should come as no surprise that energy was the story of the year. The TSX Energy Index reported a total return for the year of 63.4% following a 30% return in 2004! Geopolitical factors conspired with market speculators to drive the price of crude oil through $60 US a barrel. The energy sector finished the year comprising over 27% of the TSX Composite and contributed over one-half of the annual performance.

Utilities posted a surprising 38% return for 2005, up from a modest 9% the year previous. Concerns over power availability and the prospects of lucrative infrastructure projects drove demand for utilities. A favourable proposal to enhance the value of dividend paying stocks in the fourth quarter also provided impetus to prices at year-end.

Financials also benefited from this tax proposal and reported a total return for the year of 24% following a 20% return in 2004. All was not smooth sailing with the banking sector as some credit concerns were evident domestically and abroad. Most notably, the CIBC took a massive write-down in its third quarter with respect to Enron. The insurance sector, particularly the life companies had a better year, while the property and casualty companies reported better underwriting profits from auto but suffered where exposure to the hurricane Katrina was evident.

In all, only three of the ten major categories of the TSX posted negative returns for the year; Info-tech (-16%), Heath Care (-3%) and Consumer Staples (-1%). In general, consumer related ares performed poorly relative to the more capital intensive sectors.