With Few Virus-Resistant Bets, Canada’s Stock Rally Falls Behind

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Some of the world’s most stable banks sit in Canada. The nation’s main equity index boasts more than 170 dividend-paying companies and it has a large weighting of gold miners.

With about 124,000 cases and 9,000 deaths from Covid-19, Canada’s population has, so far, not been hit as hard by the pandemic -- one reason its job market is recovering slightly faster.

Yet a lack of coronavirus-resistant bets is holding back the rally in the S&P/TSX Composite Index while its American counterpart marches on.

Up more than 5% this year, the S&P 500 Index hit a fresh record twice this week. In Canada, meanwhile, the TSX still needs to rise another 546 points, or about 3.3%, just to break even for the year.

That’s the continuation of a pattern. The U.S. benchmark has outperformed Canada’s every year since 2011 except one (2016), leading to a very wide long-term performance gap.

With Few Virus-Resistant Bets, Canada’s Stock Rally Falls Behind

Tech and health-care stocks, two of the top sectors globally this year, make up 11% of the TSX index. Real estate, energy and financials -- the three worst-performing groups in the MSCI World Index in 2020 -- make up 44% of Canada’s benchmark.

“We just have a lot less of what I would call the coronavirus beneficiaries in Canada,” Mike Archibald, portfolio manager at AGF Investments Inc., said by phone. “The parts of the market that have been working, you have much more exposure in the U.S. with the S&P 500 and the parts of the market that have not been working -- financials and energy primarily -- is really where Canada has much more exposure.”

Gold miners and software companies, including Shopify Inc. and Enghouse Systems Ltd., have been among Canada’s handful of virus-proof stocks. Their impact on the overall market pales beside the “hundreds of names” with positive growth in the U.S., Archibald added.

Investors have also avoided or sold some dividend-paying stocks. Real estate investment trusts have suffered during a pandemic-driven recession and bank profits will continue to take a hit, as loan losses rise and rates stay low. But there have been relatively few dividend cuts in either sector.

With Few Virus-Resistant Bets, Canada’s Stock Rally Falls Behind

“Equity income is a very important part of asset allocation going forward. And sectors like financials in Canada lead the way in that,” Brian Belski, chief market strategist at BMO Capital Markets, said by phone. “The consensus, the rhetoric around February and March, was that we were going to see dividend cuts and we never got them,” he said, adding that not investing in bank stocks would be a “mistake.”

Both Archibald and Belski are confident the Canadian stock market will break even, at the very least, this year. Despite being down for the year, its still among the top-performing developed markets, according to data compiled by Bloomberg.

“As the recovery continues to proceed, we believe that Canada or the TSX will hit a new high,” said Belski.

With low rates and bond yields, “equities are still the only game in town,” said Archibald. “I think it’s just a matter of time before the TSX cracks green this year.”

Here’s what happened in this week.

Markets -- Just The Numbers

Stocks
  • Canadian stocks closed the week out flat after sliding 0.5% on Friday as materials, health care and tech stocks slumped. Gold prices slipped, heading for the first back-to-back weekly decline since June.
Bonds
  • The Canadian 10-year bond yield fell to close the week at about 0.54%, while two-year bond yield slipped to 0.28%.
Loonie
  • The Canadian dollar was the second-best performing G-10 currency up 0.6% against the greenback.

Chart of the Week

With Few Virus-Resistant Bets, Canada’s Stock Rally Falls Behind

Economics

Inflation in Canada unexpectedly fell back to near zero in July with the consumer price index increasing only 0.1% from the same month a year earlier. On a monthly basis, prices were flat, and seasonally adjusted actually fell 0.1%.

Canadian consumer confidence continued its upward climb, coinciding with recent economic data which suggests a gradual recovery in spending and business activity. Views on real estate have been driving the overall index higher as the housing market heated up over the summer.

The nation’s immigration numbers plummeted by almost two thirds in the second quarter as border restrictions remained in effect, threatening one of Canada’s main drivers of economic growth.

Economists and market watchers will be keeping an eye on second quarter GDP data due Aug. 28 and Bank of Canada Governor Tiff Macklem and Federal Reserve Chairman Jerome Powell’s speeched at the annual Jackson Hole symposium on Aug. 27.

Politics

It has been a tumultuous few days in Ottawa. Prime Minister Justin Trudeau appointed Chrystia Freeland as the country’s new finance minister after the previous finance chief, Bill Morneau, resigned amid policy differences.

He is seeking to rejuvenate his government’s mandate amid an ethics scandal and double digit unemployment and suspended all parliamentary business, promising to return next month with an “ambitious” new spending plan to help drive the recovery. Trudeau plans to introduce a new agenda on Sept. 23.

#TrendingInCanada

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