Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

The last six months of 2016 saw a dramatic outperformance of cyclical stocks relative to defensive market sectors.

denphumi/Getty Images/iStockphoto

The Canadian economy and equity markets are resource-rich and export-dependent, and this made domestic growth perfectly positioned for the increase in U.S. growth and inflation expectations that began in mid 2016. Higher growth forecasts led to rising prices for cyclical, economically sensitive stocks (such as commodity producers) that form large portions of the S&P/TSX composite index, and also for the manufacturing and industrial companies that drive economic growth.

The last six months of 2016 saw a dramatic outperformance of cyclical stocks relative to defensive market sectors. The trend of cyclical stock outperformance, however, stalled out and to some extent reversed in 2017. Whether this is just a pause or a return to the slow growth environment that previously boosted conservative, high-quality defensive sectors stocks such as telecoms and utilities, will be a major determinant of both portfolio positioning and investment returns for Canadian investors.

The first chart below shows the relative performance of global cyclical and defensive stocks. The line is simply the value of the FTSE all-world cyclicals index divided by the price of the FTSE all-world defensives index. A rising line indicates outperformance by cyclical stocks.

Story continues below advertisement

The rally in economically sensitive stocks began in early July, 2016, well before the U.S. elections, and continued until Dec. 8. Since then, cyclical sectors have underperformed defensive sectors.

The second, lower chart illustrates S&P/TSX composite sector performance during both phases. The purple bars show major sector returns from July to December, when global cyclical stocks led the market. The salmon-coloured bars show the returns in the subsequent December to the present time frame when, for the most part, defensive sectors re-assumed market leadership.

It should be noted that gold mining stocks skewed the results for the domestic materials sector. The S&P/TSX materials index would be expected to benefit from the rally in cyclical stocks during the second half of last year, but an average 31 per cent decline in gold stocks sunk returns for the materials sector as a whole. The S&P/TSX diversified mining index – another subset of the broader materials index, formed primarily from industrial metals producers – did benefit from cyclical sector strength, rising 52 per cent for the period.

The top performing TSX sectors during the cyclical rally were industrials, financials (lenders benefit from the steeper yield curve that accompanies rising inflation forecasts), consumer discretionary, technology and energy. This makes perfect sense, as these sectors historically benefit most from expectations for accelerating economic growth.

The worst performing market sectors during the cyclical rally – telecommunications, utilities and real estate – have been the best performing sectors in 2017, when defensive sectors outperformed.

The bar chart provides important strategic advice for Canadian portfolios. Investors should favour sectors that performed well in the second half of 2016 as long as an accelerating economy is the consensus forecast. If growth expectations fade, the defensive sectors that have led performance in 2017 should be emphasized.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies