What I would like to do in the next few minutes is speak briefly about each of the TSX issuers who have joined us today.
Then I would like to spend a few minutes describing our market, our competitive strengths, and the importance TSX Group places on both building our North American presence and extending our reach to Europe and the U.K.
By way of preliminaries, let me thank our sponsors today – Fasken Martineau, a leading Canadian law firm, and Standard & Poor’s, a name we are proud to be associated with through our market indices.
And because this may well be my last opportunity to do so before I take up my new responsibilities with RBC Financial, Canada’s largest bank, let me also offer general thanks to Canada’s representatives abroad, on behalf of TSX Group.
Here in London on previous occasions, as well as in Brussels, Frankfurt, Berlin and Geneva, in Oslo, New York and in other global centres, the Canadian foreign service and officials from Finance, Trade and other agencies have been unstinting in their support.
And let me also acknowledge in advance the presence of Canada’s Ambassador to the European Community.
During his time in Brussels, Ambassador Kinsman has proven a wise and articulate spokesperson for Canada’s interests in Europe, and for distinguishing Canada in European minds from the 300-pound gorilla we have as a neighbour.
The U.S. market is immensely important to Canada and Canada is important to Americans – our two-way trade with the U.S. is roughly the same as Europe’s trade with the United States, or at least with Europe before it grew by 10 countries. We generate a lot of production and jobs for each other.
Because of that, Canada is a first-rate entry point to the U.S. market for any U.K. or European company that is looking for a North American foothold but isn’t quite ready for Sarbanes-Oxley, U.S. GAAP and corporate justice Mississippi style.
What makes us such a good entry point is Canadians’ hard-won and intimate knowledge of what it takes to compete for U.S. business.
But, we also know what it means to be just outside their market looking in because even with free trade that is what North America’s geography has bequeathed to us.
In a phrase, Canada’s up-close and personal experience with American markets over decades, even a couple of centuries, means that a European player can add considerable value by entering North America through Canada.
To say this is preferable to a direct assault on the U.S. market – something in which Canadian firms also have a lot of experience – is not to diminish in the slightest the value we place on every aspect our relationship with Americans.
We value their business, we value their friendship and, inevitably, their prospects, in macro terms, become our prospects.
But our market is not the American market.
As Standard and Poor’s argued in an analysis earlier this month of the Canada-U.S. relationship, we are both Triple A countries but we “have remained very distinct societies.”
And we have new possibilities, also hard won, for building new and productive relationships throughout the global economy that complement our North American interests, even as they sometimes put us in competition with the U.S. for markets abroad.
I know the High Commissioner has been working hard with his team in promoting the possibilities of Canada within the United Kingdom. I know as well that Ambassador Kinsman has been constant in reminding people throughout the EU of this, in reminding them of Canada’s distinctive qualities and strengths, and the fact that the European-North American relationship is not bilateral but triangular.
Let me turn, then, to the issuers we are showcasing today.
We have 10 issuers, including TSX Group. Some of you will have seen them at sessions before lunch or will see others after lunch.
For those not so fortunate, our first group is from our resource energy sector. Canada is a global leader in both sectors. We list more than 60 per cent of the mining companies on major world exchanges. We have more oil and gas issuers than any other exchange in the world.
Our three companies are First Quantum Minerals which is focussed on copper and cobalt development in Africa … Pengrowth Energy Trust which is in oil and gas in Alberta … and Saskatchewan, and Precision Drilling Corporation which is in energy services.
The second industry sector features … ATI Technologies which designs, manufactures and markets multimedia solutions and graphics components for world markets.
Our third group includes Bombardier Inc. which manufactures business jets, regional aircraft and rail transportation equipment … Canadian Pacific Railway which provides rail and intermodal transport services … and CP Ships which provides sea and inland container services.
Our final group includes Angiotech Pharmaceuticals Inc. which specializes in drug coated medical devices and biomaterials … and my own company, TSX Group.
Together these companies represent some of the key sectors of our market and our economy. We are proud to have them with us today, and among the 1,300 issuers on our senior exchange.
Our issuers are the backbone of Canada’s private sector and of our economy.
So let me turn to the Canadian economy, to Canadian markets, and to our role in it as the operator of Canada’s two national stock exchanges.
They say that stock markets, at their healthiest, climb a wall of worry.
We do that as a country, too.
Americans, like Icarus, are inclined to see their market soaring endlessly into the economic sunshine. Alan Greenspan once called it “irrational exuberance”. So it always seems to be such a surprise when the wax melts and they fall back to earth.
Canadians are inclined to the opposite – sheltered in the American shadow from the world’s attention, we are more inclined to fret about how the heights we’ve scaled leave us so much further to fall.
We are always surprised when we aren’t picking ourselves up off the floor.
I’m not sure which mindset is the better one. It’s a lot easier, though, for us to meet our expectations of ourselves.
In fact, we are now nearing our eighth year of exceeding expectations, with the healthiest fiscal situation in the G-7 and leading the G-7 in growth in four years out of the last five.
But old attitudes still linger. The last year, when we fell back from leading the G-7, provides a classic illustration of our penchant for under-expecting and over-performing.
In the conventional wisdom, 2003 was a bad year for Canada. The Canadian dollar soared against the U.S. currency, whacking our export industries. What SARS didn’t do to tourism, lengthy border delays completed.
A single case of mad cow disease prompted the U.S. to shut the border entirely to live Canadian cattle, and it’s still shut. A week-long power blackout brought Canada’s industrial heartland to a halt. At one point British Columbia looked like it was burning down, the forest fires were so bad.
Any of these blows might have knocked back a less resilient economy. All of them together seemed at the time to be a hammer blow for the Canadian economy, and that was reflected in the projections for growth that began to appear last fall.
The party was over, they said. Reality has returned. We’re falling to earth just as the U.S. economy is starting to soar again.
The professional economists revised their growth projections downward. Everybody prepared for the worst, expecting that normal growth would not re-emerge until late in 2005.
The Canadian economy did in fact touch the ground, but only briefly before it took right off again.
The most recent numbers tell the story of an accelerating economy that is back in the groove it was in before 2003 when Canadian growth led the U.S. for four years running.
The Economist, for example, had predicted for 2004 that Canada’s first quarter growth would be only 1.6 per cent.
But the preliminary number came in at 2.4 per cent. It has now been revised upward to 3.0 per cent.
In the second quarter, instead of the expected 3.0 per cent, the preliminary figure is 4.3 per cent.
What wasn’t expected for another year has already happened.
U.S. figures, meanwhile, have been revised downward.
The first quarter was expected to come in at 4.5 per cent. It came in at 3.9 per cent.
The second quarter was forecast at 3.0 per cent. It came in at 2.8 per cent.
So somewhere in the second quarter, Canadian growth accelerated past a decelerating U.S. economy.
That is reflected in profits for companies in the S&P/TSX Composite index. Profits were up 32.8 per cent in the second quarter over a year ago, compared to 25.3 per cent for U.S. companies in the S&P 500 Index.
For the next two quarters, Canadian profits are projected to rise at 29 and 24 per cent respectively compared to U.S. profits projected at 14.7 and 15.6 per cent.
Given the unexpected hits the Canadian economy took last year, and some troubling issues in the global economy, caution certainly remains appropriate.
The notable worry is the heavy dependence of the U.S. on foreign investment to fund both its record fiscal deficit and its record current account deficit.
We are, in our new and unlikely role as net exporters of capital, one of the providers of that investment. So far this year, Canadians having been buying up twice as many U.S. companies as the reverse.
But a single purchase of a major corporation – like Vivendi’s purchase of Seagram’s a few years ago – can transform the numbers in a flash.
Caveats notwithstanding, The Economist Intelligence Unit has maintained its prediction that Canada will be the leading industrial economy for the 2004-2008 period, and this year’s numbers are at least consistent with that coming about.
There are some important elements supporting the Economist’s projections.
One is the way Canada shucked off the effect of a 20 per cent revaluation of the Canadian dollar against the U.S. The fears were that Canadian export industries were ill-equipped to confront such a heavy blow to its competitiveness. That matters. One Canadian province, Ontario, sells more cars to the United States than Japan.
But exports seem to have recovered quite smartly. In five of the first seven months of this year, auto exports have been up. This suggests that the Canadian manufacturing sector has more resilience than it was given credit for.
Canada’s resource strengths have ceased to be a drag on the economy and instead become a strength, especially in areas like energy and base metals.
China’s burgeoning growth, Japan’s long awaited recovery, and U.S. hunger for Canadian energy – the most secure imported energy the U.S. has – suggest there has been a long term shift in Canada’s terms of trade, not a momentary blip.
They need steel. They need coking coal. Prices for steel and coal reflect the demand. Canada is big in both.
One interesting result of this is an unexpected diversification of our trade in the last two years. The U.S. share of Canadian exports has slipped from 85 per cent to 81 per cent.
Exports to China, meanwhile, are up 58 per cent in the first seven months of this year. China is now our fourth largest customer, right after Japan and the U.K.
There are other things happening, too, that auger well for The Economist’s forecast.
Up until 2000, employment growth in the U.S. exceeded Canadian job growth by about a third.
Since then Canadian job growth has continued its climb while the U.S. has settled into a pattern where population growth – about 220,000 a month – is running at a rate 50 per cent higher than the U.S. rate of job growth.
Indeed, by one estimate, had the U.S. kept pace with Canada since 2001, it would have added nine million jobs instead of losing 2.2 million before employment began to grow again this year.
This stronger employment picture matters to Canadian capital markets, and to TSX Group, because Canadians are increasingly involved in capital markets, individually and collectively.
And Canadians rely on their capital markets to fund development to a degree matched by only a few other countries. To illustrate, Canada’s current market cap is roughly 120 per cent of GDP. That is about the same as for the United States and the U.K. but more than double the of market cap to GDP for Germany.
In a phrase, Canadians have made capital markets central to financing our future. That is a great strength that augments all of our other strengths as an economy and a society.
Canada’s investment culture, reflecting this, is strong and deep. Our surveys show that in the last two years, the number of Canadian adults participating directly or through mutual funds in the stock market has climbed from 46 per cent to 49 per cent. The comparable figure for the U.S. is 52 per cent, which is, as the political pros say, within the margin of error.
Unlike in the U.S., however, Canadians have two critical sources of security which, paradoxically, enhance their capacity and their willingness to invest and take risks in buying securities and in creating and building businesses.
One is a public pension system that independent analysts rate as actuarially sound for the next 50 years, a system that is broadly integrated with private pensions in Canada.
This is strikingly different from the U.S. where the health of the private pension system has become a major concern, particularly for employees in troubled industries like airlines and steel, and there has been talk of raising the retirement age from 65 and delaying the start of old age security benefits.
Public pensions are also a growing factor in Canadian equity markets. The Canada Pension Plan and the parallel Quebec Pension Plan invest a portion of their capital in equities, which means that close to 100 per cent of working Canadians are invested one way or the other in the market.
The second is a national health insurance system that takes some four per cent less of gross domestic product than the U.S. health system. Canadians’ health costs 9.5 per cent of GDP. Americans’ health costs some 13.5 per cent.
The Canadian universal healthcare system, in addition, is worth some $3,000 per worker to a company located in Canada and serving the U.S. market, compared to the private health premiums that have to be carried by a company locating in, say, Michigan or New York State, right across the border from Ontario.
So apart from all the fiscal and economic reasons for investing, listing and locating in Canada, there are some solid social policy reasons as well.
That provides some context for the Canadian market’s out performance relative to U.S. performance since the late 1990s.
Let me turn briefly to our market and how it has evolved.
In 1999, we had one of the unhealthier capital market structures in the world, with a half dozen primarily local exchanges each bleeding the others of liquidity and order flow.
Our problems at Toronto Stock Exchange were compounded by our having an out of date trading system that had been pushed to its limits by the surge in trading volumes during the tech boom.
Meanwhile, the real competitors – U.S. exchanges and dealer networks – were cherry picking our market. Nasdaq, for example, cut a deal with the Quebec government, then of separatist persuasion, to set up shop in Montreal. NYSE was aggressively going after Canadian order flow for inter-listed companies.
The new electronic communications networks were beginning their phenomenal growth in exploiting U.S. market inefficiencies.
What a different picture we have five years later.
Canada now has one of the healthiest market structures in the world. Six stock exchanges have become two, both of which are now part of TSX Group. Our new trading system is state of the art, with a record of availability to rival any major exchange.
We have reclaimed a bigger chunk of inter-listed trading – in the last 12 months the dollar value of our share of inter-listed trading is up 25 per cent or more than $100 billion over the previous 12 months.
Our overall value of trading is up, too, by 36.7 per cent in the first eight months, compared to the first eight months of last year. The volume of trades is up 22.6 per cent, and the number of transactions up 42.4 per cent.
If there are problems, they are south of the border. You are familiar with the tribulations of NYSE and Nasdaq.
Nasdaq especially has an uphill struggle – while the value of our share of inter-listed trading has been rising, the value of their share of trading in Nasdaq-listed companies is down some $150 billion since the start of last year.
Listings on U.S. markets are also down, especially foreign listings. In 2000, 43 per cent of the proceeds of IPOs in the U.S. market were foreign listings. This year it’s 16 per cent.
In the years prior to 2001, foreign IPOs, listings in the U.S. mainly from Europe and Latin America, Canada and Mexico averaged 50 a year on the NYSE alone. So far this year there have been only eight.
Canada is on the other side of the curve. In the first eight months of this year, compared with the same period the year before, our IPOs are up 77.1 per cent, the number of new issuers is up 62.3 per cent and IPO financing is up 33.6 per cent.
And while they have been retrenching, we have been expanding.
In addition to TSX and TSX Venture Exchange, TSX Group now includes a 45 per cent share in CanDeal, a new electronic system for trading fixed income securities that we bought into in 2002.
This year, we acquired NGX, a Calgary based energy exchange.
This moved us into commodities and energy-related financial derivatives. It also gave us new exposure to the U.S. market, and strengthened our relationships with oil, gas and coal companies – of which we list more than any other exchange or group of exchanges in the world. <:> When we decided to buy NGX, it had been growing 35 per cent a year for 10 years. But the clincher was its integrity, which it demonstrated in how it dealt with Enron.
When Enron failed to meet NGX collateral requirements, NGX closed out the company’s entire position in less than half an hour. That’s tough to do to your biggest customer, but NGX did it, and when Enron collapsed NGX did not lose a nickel.
In addition to these acquisitions, we have aggressively expanded our data business and we’ve entered the corporate information business through an agreement with Canada NewsWire.
And we are seeking to build on our dominant position in the global mining industry by marketing our strengths in Australia, South America and South Africa – with some success I might add.
Global miners recognize the importance of the concentration of mining expertise in Canada – including the analyst community, financial expertise and a sophisticated investor base that understands, perhaps uniquely, the risks and rewards of exploration and development.
More than 60 per cent of the mining companies listed on major world exchanges are listed on TSX Group’s two exchanges.
The important question, of course, is how investors in TSX listed stocks have fared.
As a matter of fact, they have fared very well.
Let me demonstrate how, with two indices– for the U.S. market, the S&P 500, and for the Canadian, the S&P/TSX Composite.
From the end of 1998 to this last week, the S&P 500, on a total return basis, was actually down slightly, minus 2.4 per cent.
And the comparable Canadian number?
Over the same period, the S&P/TSX Composite and its predecessor, the TSE 300, were up a combined total of 41.4 per cent.
That single number tells you what you need to know.
Canada now has one of the strongest economies in the world, resilient, fiscally sound, with a strong social system that is soundly financed.
We have one of the strongest capital markets in the world, as reflected in our market cap in relation to our economic output. With our public pension systems participating in the market, we have the highest proportion in the world of investors participating directly or indirectly in our market.
And we have one of the healthiest exchanges in the world, as reflected not only in our trading and listing numbers, but in terms of the total return we are providing for our investors. With a 12-month total return of 72.9 per cent as of August 31, we’re behind only one other publicly listed exchange in the world. That exchange – the Chicago Mercantile Exchange – is in derivatives, I might note, not equities.
That performance reflects three things.
It reflects the fact that in five years, we’ve created a world-class institution at the heart of a restructured national capital market.
It reflects the fact that in 10 years, Canada has transformed its finances and its prospects so that they are now judged to be the best among the global industrial economies.
And it reflects that, much to their surprise, Canadians are coming to have a new confidence in their country, in their economy, in their stock exchanges and, despite their every instinct, in themselves.
Now we have to do something we’re new at. We have to sell that package – and the Canadian brand – to the world. And that is what today is about. Thank you for being a part of it.
