Amid the recent collapse in oil prices, it's the Canadian banks – not the energy companies – that have been sold off by investors.
After drifting lower since late June, oil prices fell an additional 20 per cent in the wake of the meeting of the Organization of Petroleum Exporting Countries (OPEC) on Nov. 27, at which the cartel elected to maintain its production quota rather than curtail output in an attempt to prop up prices. Had investors believed that the plunge in energy prices on that fateful day marked a bottom on the commodity and put funds to work in oil stocks, they would've been wrong – but still able to eke out a 1-per-cent return as of Monday's close. However, if investors had elected to tuck money away in Canadian bank stocks, long renowned for their stability, steady growth and dividend increases, they would've suffered an 8 per cent decline over the same period.
In some respects, this yawning gap between the two segments speaks to pessimism on the Canadian economy that runs deeper than oil prices.
The financials have stressed that their direct exposure to the energy patch is minimal, but reduced activity therein implies a slowdown in lending to the segment is inescapable. A flat yield curve continues to crimp profitability; the prospects for domestic loan growth are limited by the notoriously indebted Canadian consumer. What's more, a downturn in employment linked to oil patch layoffs could spur a rise in non-performing loans, and capital markets activity is not poised to live up to its performance in 2014, to boot.
"You tend not to see M&A in this type of market," said Martin Pelletier, portfolio manager at TriVest Wealth Counsel. "No one wants to do a bad deal in bear markets."
Sentiment on the space has turned so negative that Barclays analyst John Aiken warned American investors would opt to short-sell Canadian banks once again, a repeat of the failed trade from 2013.
For energy companies, the "buy the dips" mentality that has persisted in the market since mid-December signals perpetual optimism on the sector; the widespread belief that after prices halved from their mid-2014 peak, conditions couldn't possibly get much worse. In addition, the decline in the Canadian dollar has also offset some of the impact of the decline in oil prices for these companies, while some have hedged a substantial amount of 2015 production at prices well above current levels.
According to Brian Belski, chief investment strategist at BMO Nesbitt Burns, the perception of value exists in both energy and the banks, but is only truly present in one.
"The real intrinsic, fundamental value is coming from the financials," he said. "Canadian banks have been and always will be excellent stewards of capital."
In a recent note, the strategist referred to energy stocks as a "value trap," and indicated that the outperformance of the energy sector since late November was a "near-term aberration."
Part of the reason behind why the energy sector has held up so well is that investors haven't been able to get an accurate read on how lower prices will affect financial results. The earnings season in Canada is just starting to get in full swing, and investors may be singing a different tune on the space by the end of it should analysts' consensus estimates prove to be too optimistic.
Suncor Energy Inc.'s quarterly report portends such a crude awakening. Last week, Canada's largest energy company reported an 81-per-cent year-over-year drop in fourth-quarter profits and announced that it was shelving its share-repurchasing program in light of lower oil prices.
"Three months does not cure a decade-long notion of oil and energy being the place to be," said Mr. Belski. "As Canadians, it's internal in our DNA to love energy stocks."