A board displaying Toronto Stock Exchange (TSX) stock information is seen in this file photo.MARK BLINCH/Reuters
Investors in Canadian commodity stocks, already hammered by the plunge in everything from copper to crude, are now facing the worst earnings season in six years.
With energy and materials producers in the S&P/TSX composite index set to release second-quarter results, the impact on Canada's resource-rich equity market will likely be exacerbated as the meltdown in commodities prices intensifies.
"I don't see a case to be bullish or to be positive" on resource stocks, said John Stephenson, chief executive officer and founder of Stephenson & Co. Capital Management in Toronto. His firm manages about $50-million.
If earnings disappoint, "it would put further pressure on Canadian energy or resource stocks," he said. "Particularly in the energy sector, they're trading at a ridiculously high valuation. They have not priced in a big reduction."
Companies in the benchmark Canadian equity gauge reporting results for the latest season are expected to post earnings per share of $135.48, a 39-per-cent decline compared with year-ago levels. That's the biggest drop since the third quarter of 2009, according to data collected by Bloomberg.
Results during the latest quarter were weighed down by economic volatility in Greece and China. Companies also faced oil prices that were more than 40 per cent below year-earlier levels, while gold in New York declined 11 per cent in the same period.
The S&P/TSX slumped 0.3 per cent on Thursday for a fifth day of losses. The benchmark gauge has lost more than 3 per cent in five sessions, erasing gains for the year.
Raw materials and energy producers are vying for the worst-performing stocks in Canada this year even as the full impact of the latest rout in resources may not be felt until the third-quarter period.
Commodities rout
Since June 30, prices for raw materials have plunged to 2002 levels amid mounting concern that a global economic slowdown will strangle demand for commodities. Gold prices hit a five-year low on Wednesday, the longest losing streak since 1996. Crude tumbled to an April low, as prices approached a bear market, while copper fell in July to levels unseen since 2009.
The S&P/TSX composite materials index, which includes companies ranging from gold miners to forest-product companies, has plummeted 15 per cent this year to the lowest level since 2004. Nickel producer Sherritt International Corp. and Iamgold Corp. are the index's worst performers with declines of more than 46 per cent.
Almost all of the 248 members in the S&P/TSX are expected to report results in July and August. The Bank of Canada reduced its 2015 GDP forecast by almost half to 1.1 per cent on July 15, after cutting its benchmark interest rate for the second time this year in the face of a continued slump in oil prices.
"The energy and materials sectors are expected to experience significant declines," Matthieu Arseneau, a senior economist at National Bank of Canada's research unit, said in a July 20 report.
Mr. Arseneau projects energy stocks in the S&P/TSX to post a 72-per-cent decline in net income from year-ago levels, while raw-materials earnings will slump 26 per cent.
He expects the S&P/TSX to post a 15-per-cent drop in second-quarter earnings, a figure that improves to a 6.3-per-cent gain when resources are excluded.
The eight other industries in the benchmark gauge are forecast to post positive returns, led by an 84-per-cent increase among utilities stocks, the report said.
Ian Nakamoto, director of research at MacDougall MacDougall & MacTier Inc. in Toronto, said the market's expectations have been so damped by the current volatility that it's possible stocks will get a brief rally if they manage to beat projections.
Love affair
"Canadians have a love affair with oil and gas, so if earnings come in better than expected people could get in," Mr. Nakamoto said.
More important than any particular earnings figure for investors will be broader factors such as global crude supply and demand, he said. Investors will also be listening closely for guidance from executives about their plans for the third quarter and beyond.
"It's not just the numbers that are in the past," Mr. Nakamoto said. "People are going to be listening for whether there will be dividend reductions, exploration cutbacks, further staff reductions. With the recent downturn in the last couple of weeks people are more interested what management will do in the next year."
With the Bloomberg commodity index down 7.2 per cent this month, to the lowest level since February, 2002, the daily market moves may be hard to ignore.
The decline in the price of gold and the West Texas intermediate price of oil can be attributed to the strengthening of the U.S. dollar, ample production in the United States and abroad including an expected return to the global market by Iran and worries about China, Mr. Stephenson said.
"All of that combined is adding to the sense of malaise in commodity land, which is unfortunate," he said.