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Canada Stocks Reach Record But `Eeyore Complex’ Pervades

October 27, 2017


Not even a record high can shake Canadian stocks of their ‘Eeyore’ complex.

The S&P/TSX Composite Index closed up 0.4 percent to 15,953.51 on Friday, surpassing the record on Feb. 21 after outpacing its global peers since early September. Financials have accounted for more than half of the advance, with industrials, consumer discretionary and energy also contributing.

But the grind higher has been so long and tortuous, investors are loathe to put much faith in the rally.

“We’re looking for opportunities to take money off the table,” Sadiq Adatia, who oversees about C$18.5 billion ($14.4 billion) as chief investment officer at Sun Life Global Investments, said in a phone interview. “Just look at all the risks that are there. Whether it’s Nafta, real estate, consumer debt — all those things are negatives to Canada’s economy.”

After wallowing in the red for a good chunk of the year, the S&P/TSX has gained 6.5 percent since its September low. That strength is the result of improving oil prices, rising interest rates which have fattened banks’ lending margins and, perhaps most importantly, a market that had simply become too cheap to ignore.

The S&P/TSX’s gains since Sept. 8 surpass a 4.9 percent increase in the S&P 500 Index and a 3.6 percent gain in the MSCI World Index. This is a reversal from the first eight months of the year, when the Canadian benchmark fell 0.5 percent compared with a 10 percent gain for the S&P 500 and a 12 percent increase for the MSCI World Index.

Even with its recent gains, the Canadian index is way behind its U.S. counterparts, which have hit a series of record highs this year. The year-to-date gain for the S&P/TSX is just 4.4 percent versus 15 percent for the S&P 500. Canada still lags most developed markets, ahead of only Israel and Australia, according to data compiled by Bloomberg.

Canada’s stock underperformance came, ironically, as its economy outpaced its Group of Seven peers with 4.5 percent growth in the second quarter.



“This ‘Eeyore’ complex has been the defining theme for Canadian equities throughout 2017 and has resulted in Canada being one of the worst-performing equity markets year to date,” Brian Belski, chief investment strategist at BMO Capital Markets, said in a recent note, referring to the morose Winnie-the-Pooh character who sees doom and gloom at every turn.

Overweight Financials

Belski, who predicted the rebound in a Sept. 14 note that argued a “BIG bounce is coming once calmer heads prevail,” is optimistic that the rally has legs, pointing to stronger-than-expected earnings growth and improving fundamentals. Belski’s year-end target for the S&P/TSX is 16,000, a gain of just 0.3 percent from here, although he says that may be conservative.

“I think people are genuinely negative Canadian stocks and it’s a classic game of catch-up,” he said in an interview, adding that investors need to ditch their obsession with commodities. “All they really care about is gold and oil, gold and oil, and if those two things are going up we feel better. We’ve got great companies in Canada but we consider ourselves a failure unless gold and oil are going up.”

Belski recommends an overweight position in Canadian financials, industrials and materials. He likes the big banks, insurers, railways, and individual stocks including West Fraser Timber Co., Waste Connections Inc., Canadian Tire Corp., Dollarama Inc. and Loblaw Cos.

Belski’s view is supported by technical analysis. The C$1.7 billion Horizon S&P/TSX 60 Index ETF recently formed a golden cross, meaning the short-term moving average has broken above the long-term moving average — a buy signal.

Others are more reticent. Javed Mirza, technical analyst at Canaccord Genuity Corp., said the S&P/TSX seems overbought and predicted a near-term pause or pullback. The index “may hit an air pocket sooner rather than later” if investors don’t embrace commodity stocks, because financials can’t carry the rally forever, added Martin Roberge, portfolio strategist at Canaccord.

TD Asset Management, meanwhile, is underweight Canadian equities on the expectation that the economy will underperform the U.S. due to high household debt, modest oil prices and low productivity.

“All that says to me that the Canadian economy should slow a little bit while the U.S. economy looks like it’s in pretty good shape,” Bruce Cooper, who manages C$344 billion as chief investment officer of TD Asset Management, said in an interview this week. “We’ve had a preference for global equities over Canadian this year, and that continues to be the case.”

Sun Life’s Adatia is also worried about tapped-out consumers, a deflating housing market and the risk that Nafta renegotiations could fall apart. He said a stock pullback is “not a question of if, it’s a question of when.”

“We have a lot of defensive positioning in Canada for that pullback,” he said. “I do not think there’s much more upside from here.”

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