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Impending Profit Gloom Has Canada Investors Asking What’s Next


By Addison Kliewer

(Bloomberg)A deep recession that cost millions of people their jobs. Empty airports, restaurants and hotels. Tens of thousands of people sickened by a virus that ripped through parts of Canada’s largest cities.That was the story of the second quarter — an economic and health nightmare because of Covid-19. Starting next week, investors in Canada will get to see the extent of the damage to companies. More than that, they will be watching for clues about earnings power in the future, as cities and provinces try to restart their economies.

Industry bellwethers such as Canadian Pacific Railway Ltd., Suncor Energy Inc., Rogers Communications Inc. and Teck Resources Ltd. report second-quarter earnings next week. For many firms, results will be bad. The important question is how robust are the signs of recovery.

While profit expectations are still at a four-year low, strategists have become more optimistic lately, according to data compiled by Bloomberg.

Profit expectations for Canadian companies are recovering

In the U.S., almost 10% of companies in the S&P 500 have reported results and so far, a majority of them beat analyst expectations on sales and profit, according to data compiled by Bloomberg.

In Canada, three groups make up nearly half of the S&P/TSX Composite Index: banks, miners and energy firms. The latter two sectors report first; banks won’t report again until later in the summer.

Precious metals miners are a bright spot in a seemingly grim period. The flight to havens has boosted the price of gold. “I think that’s a sector that really could benefit from much better than expected earnings — and investors start to shift their portfolios accordingly and go, ‘Hey, over a longer-term basis, we need to actually be in the sector,’” said Brooke Thackray, an analyst at Horizons ETFs Management (Canada) Inc.

Oil and gas firms were reeling from low prices last quarter, but investors already know that. What matters is the production outlook “because that will determine the earnings potential for the energy sector over the course of the next six to 12 months,” said Philip Petursson, chief investment strategist at Manulife Investment Management.

With uncertainty lingering, Canadian investors should be “very, very selective” when choosing which individual securities they want to own, Petursson said. Companies may not come out with exceptional numbers, but beating forecasts, even by a small amount, can be seen as a win in the second quarter.

Here’s what happened this week.

Markets — Just The Numbers

Stocks
  • The S&P/TSX Composite Index climbed over the 16,000 milestone, gaining 2.6% in five days and extending its winning streak to three weeks.
Bonds
  • The Canadian 10-year bond yield dipped to 0.525%, from 0.55% a week ago, while two-year bond yield slipped to 0.28%. Click here for our weekly bond wrap.
Loonie
  • The Canadian dollar strengthened slightly, about 0.1%, to C$1.3583 per U.S. dollar.

Chart of the Week

Canadian corporate bond yields decline to the lowest on record

Economics

The Bank of Canada pledged to keep interest rates at historically low levels for years to help spur the nation’s economic recovery. In Tiff Macklem’s first official rate decision as governor, the central bank promised to keep the benchmark rate at 0.25% until unemployment falls closer to pre-pandemic levels and inflation returns sustainably to a 2% target. That would suggest rates won’t rise until after 2022, based on the bank’s new quarterly forecasts.

Other economic indicators announced this week include factory prices that rose 0.4% in June compared with the prior month and a 63% surge in existing home sales (prices climbed 0.5%).

Next week, economists will keep an eye on May retail sales figures and June inflation data.

Politics

Prime Minister Justin Trudeau apologized for his role in approving a contract to a charity with deep ties to his family, putting his remarkable ability to recover from missteps to yet another test. His finance minister, Bill Morneau, is also facing an ethics probe over his involvement with the charity.

In a briefing Thursday, Trudeau announced the federal and provincial governments have agreed to a C$19 billion Covid-19 plan that includes child care, sick leave and transit funding. He also confirmed that U.S.-Canada border restrictions have been extended until Aug. 21.

Russian state intelligence is hacking international research centers that are racing to develop a Covid-19 vaccine, the U.K., U.S. and Canadian governments said. It is unclear whether research facilities have been damaged or if vaccine programs have been set back as a result of the hacks but officials warned that the cyberattacks are ongoing.



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