Canada's banks start to report fiscal fourth-quarter and annual results later this week. What are investors expecting and what is the preferred strategy?
Thackray's 2012 Investor's Guide notes that the Canadian bank sector has two periods of seasonal strength. The current period is from Oct. 10 to Dec. 31. The trade has been profitable in 18 of the past 22 periods. Average return per period was 5.6 per cent plus a quarterly dividend. Strength is related to anticipation of good news when fiscal fourth-quarter earnings for the period ending Oct. 31st are released near the beginning of December. Fourth-quarter reports frequently include dividend increases, announcements of share buy backs, share splits and encouraging news about prospects for the next fiscal year.
Seasonal influences have not appeared this year to date. The S&P/TSX Financial Services Index closed at a 14-month low on Friday. Investors have been spooked by deteriorating financial conditions in Europe. The Canadian banks are not believed to hold significant holdings in European sovereign debt and other financial assets, but Canadian investor sentiment remains skeptical.
Momentum indicators show that Canada's banks are deeply oversold following a 11.0 per cent average decline since Oct. 27. On the other hand, their strength relative to the TSX Composite has been positive during the past three weeks when equity markets have fallen sharply. A possible reason for their relative outperformance is their high dividend yield. On average, Canada's top six banks currently offer a dividend yield of 4.69 per cent.
Another reason for their positive relative performance is anticipation of mildly encouraging fourth-quarter results. Average gain in fourth-quarter earnings per share for Canada's top six banks on a year-over-year basis is 8.3 per cent.
Investors can choose between a wide variety of exchange traded funds that are heavily weighted in Canadian bank stocks. The best known and most actively traded ETF in the sector is iShares S&P/TSX Capped Financial Services Index Fund . Weight of the banks in the Index is approximately 75 per cent.
Claymore offers the Equal Weight Banc and Lifeco ETF . The ETF holds Canada's top six banks and top four insurance companies.
BMO Capital offers the BMO S&P/TSX Equal Weight Banks Index ETF . The Index is equally weighted in Canada top six banks. BMO Capital also offers the BMO Covered Call Canadian Banks ETF .
Horizons offers leveraged products based on the daily performance of the S&P/TSX Capped Financial Services Index. The BetaPro S&P/TSX Capped Financial Bull + ETF is designed to realize twice the daily upside return on the Index. The BetaPro S&P/TSX Capped Financial Bear + ETF is designed to realize twice the daily downside return on the index.
Preferred strategy is to accumulate an ETF in the sector when confirmed signs of a technical bottom appear.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/