Weaker C$ may trigger takeovers on TSX, hollowing out investor choice

By Fergal Smith
TORONTO, Feb 11 (Reuters) - Corporate Canada is on sale for
foreign buyers after the Canadian dollar plunged, potentially
triggering takeovers that hollow out investor choice in an
already concentrated stock market, portfolio managers warned.
A narrower pool of investment choices would reduce the
opportunity to diversify, exposing Canadian investors to greater
risk amid a highly volatile period for stock markets.
U.S. home improvement retailer Lowe's Cos Inc LOW.N agreed
this month to buy Canada's Rona Inc RON.TO for C$3.2 billion,
paying a premium of more than 100 percent after the Canadian
dollar fell from parity when a much lower bid was rejected in
2012.
If the deal goes through it will eliminate a consumer
discretionary name from a bank- and resource-dominated local
stock market.
"This is one of the first companies that is now going to be
taken over by U.S. companies because our dollar is so low," said
Norman Levine, managing director, Portfolio Management
Corporation.
"It's bad long term for the Canadian investor," he added.
Easy to understand, easy to value real estate investment
trusts (REITs) could also be on the radar for large U.S.
players, according to Lorne Steinberg, president of Lorne
Steinberg Wealth Management.
"There are a number of big REITs that own good juicy
portfolios of properties that throw off cash flows," said
Steinberg. "There is also enough scale there that you could see
potentially a large deal"
To be sure, new listings can add to the menu for investors.
But initial public offerings have been lean at the start of
2016.
Moreover, portfolio managers worry that Canada's stock
market is already too narrow. Together, the protected financial
and telecom sectors make up 43 percent of the S&P/TSX Composite
index, while out of favor energy and mining stocks account for
another 28 percent.
Once dominant technology name BlackBerry Ltd BB.TO has
seen its market capitalization vastly reduced, while industrial
sector icon Bombardier Inc BBDb.TO has been reduced to a penny
stock.
The index is "too cyclical" and needs to "broaden out," said
Elvis Picardo, a strategist at Global Securities in Vancouver.
"It tends to put investors at undue risk."
However, Picardo sees scope for a weaker currency to
accelerate the transition by giving companies that earn revenue
outside of Canada, such as CGI Group Inc GIBa.TO , greater
"firepower."
He hopes for growing market capitalizations to allow sectors
like technology and utilities to contribute more to the index
going forward.