Canada Stocks Reach Record as Energy, Tech Add to Pot Rally

(Bloomberg) -- Canadian stocks jumped to a record, driven by a resurgent energy sector and a rally in volatile cannabis shares.

The benchmark S&P/TSX Composite Index rose above the intraday high of 16,586.46 reached on July 13, and was up 0.1 percent at 10:36 a.m. The index has gained 16 percent this year, joining a global market rally after its best first quarter in 19 years. The Canadian gauge is the fourth-best performer among developed markets this year, according to data compiled by Bloomberg.

“We were almost at this level last summer, but it was expensive then,” Luc Vallee, chief strategist at Laurentian Bank Securities, said by phone from Montreal. “Now, one year later, oil prospects look better, earnings have grown, the pot sector has certainly added to the positive momentum and the multiples are not that high, so there’s still room to grow as long as interest rates remain where they are.”

Vallee sees the index gaining another 8 percent to 9 percent by the end of the year.

Stocks have been rallying after central banks signaled they would put further interest rate hikes on hold as the global economy hit a soft patch at the end of last year. Bank of Canada Governor Stephen Poloz reinforced that perception at the International Monetary Fund Meetings this past weekend, saying policy would be dependent on data.

Hexo Rally

Cannabis shares have been leading the charge in Canada, driving the S&P/TSX Health Care Index to a 46 percent gain as companies defy qualms of overvaluation amid a patchy roll-out of sales since the country legalized recreational sales in October.

While first-quarter earnings are likely to disappoint, according to Bank of Nova Scotia, that hasn’t stopped stocks such as Hexo Corp. from surging 93 percent, making in it the top performer in the sector after being seen as undervalued last year. Canopy Growth Corp.’s deal to buy New York-based Acreage Holdings Inc. on Thursday shows there are ways for Canadian marijuana companies to get a foothold in the U.S., despite the fact the government still bans the drug at the federal level. Canopy was up 7.4 percent to C$61.39.

Tech stocks have also been strong, advancing about 27 percent this year. E-commerce company Shopify Inc. remains the stalwart, with Descartes Systems Group Inc. adding heft with a 40 percent surge this year. The Waterloo, Ontario-based supply-chain and logistics software company is also benefiting from the move to online shopping. The index’s 25 percent gain in the first quarter was the best quarterly advance since 2009.

Energy Rebound

Energy stocks are also having a resurgence with oil prices up by about 40 percent since the beginning of the year. The traditional discount Canadian crude carries has shrunk to about C$10 a barrel, back to 2017 levels, aided by the Alberta government’s enforced production cuts.

The optimism has begun to draw in bargain hunters including Houston-based Bison Interests LLC, which is scooping up stocks such as Crescent Point Energy Corp. and Journey Energy Inc. which chief investment officer Josh Young said trades at a significant discount.

The S&P/TSX Composite Energy index has gained 20 percent, this year, led by Precision Drilling Corp. which is up 56 percent.

TransAlta Corp. has also been driving the broader index, with a 77 percent gain. The Calgary-based power producer has been targeted by activist investors Mangrove Partners and an entity controlled by Bluescape Energy Partners, who want more details on the company’s recent investment from Brookfield Asset Management Inc.

More Gains

Canadian banks have been in the spotlight recently amid renewed calls for a retrenchment amid a housing market slowdown and a record consumer debt load. Steve Eisman, who foresaw the collapse of subprime mortgages before the 2008 financial crisis and is shorting Royal Bank of Canada and Canadian Imperial Bank of Commerce, said just reversion to more normal credit conditions will lead to weaker earnings for the banks.

Bank stocks have mostly shrugged off the threat with Bank of Montreal up by 18 percent this year Royal Bank up by 14 percent and CIBC gaining 9.1 percent.

Brian Belski, chief investment strategist at BMO Capital Markets, said Canada is in a lot better state than most people think. His base case is for the S&P/TSX Index to reach 17,000 by the end of the year, about 3.5 percent higher than current levels.

“We think energy is providing great value, we think financials are the best managed assets in the world in terms of financial companies and communication services have a great combination of cash growth and dividend growth,” Belski said in an interview before the record high.

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