While Canadian GDP growth appears to be headed south in 2015, several sectors appear poised to benefit from cheaper oil.Mark Blinch/The Globe and Mail
If Canada is in trouble, the stock market is happily oblivious to it.
The performance of Canadian stocks this year stands in glaring contrast to the indicators of concern that have pervaded Canada's economy, its currency and its commodity markets.
Despite Canada's abruptly diminished stature, particularly relative to the stirring behemoth that is the U.S. economy, every sector but one of the S&P/TSX composite index resides in positive territory since the start of the year. In fact, sector growth was universal until Friday, when Canadian financial stocks slipped into a marginal loss on the year.
The index has gained 3.7 per cent in the first 35 trading days of the year, which amounts to an annualized return of more than 25 per cent.
"Why the substantial disconnect between the world of finance and life in the trenches?" asked Peter Buchanan, senior economist at CIBC World Markets, in a research note released on Friday.
After all, there have been few domestic developments to inspire confidence in the Canadian market. Oil prices have remained depressed, declining by another 6.4 per cent year to date to about $50 (U.S.) per barrel for West Texas intermediate, after the year ended on a bewildering descent. The Canadian dollar has lost more than 6 cents against the U.S. dollar since the start of January. And cuts to the country's expected economic growth coincided with a surprise rate cut from the Bank of Canada in January.
But it's important to reiterate that the stock market is not a barometer of the domestic economy, Mr. Buchanan said. GDP growth has historically proven a poor indicator of equity performance.
"The current year is shaping up as a forgettable one for Canada's economy," he said. But, "a short on Canadian GDP growth is by no means a reason to short the market."
The global economy, more so than the domestic one, generates the forces that direct Canadian stock values. Foreign markets account for about 58 per cent of the revenue streams of companies in the Canadian index, compared with about 48 per cent for S&P 500 companies, Mr. Buchanan said.
And while the global outlook does not exactly point to a vast expansion of world economic activity, there are sources of resilience from which the TSX might draw strength.
First, there's the corresponding upside from low oil prices.
Canada's slide in the standings among developed economies was precipitated by the deep discounts applied to crude oil, a commodity that came into abundant supply in recent months.
Bank of Canada Governor Stephen Poloz called the oil price shock "unambiguously negative" for Canada last month. But that's not to say that the counteracting positives are inconsequential, Mr. Buchanan said.
After the correction in crude oil, non-energy stocks account for 78.5 per cent of the market capitalization of the Composite, and many of those companies are beneficiaries of cheap energy.
Energy importing countries such as China and India also have something to gain from the oil rout. And Canadian exporters benefit from the strength of their trading partners, of which there is none more important, of course, than the resurgent U.S.
The low loonie also helps Canadian exports. Fourth-quarter earnings of Canadian non-energy companies, which advanced by about 15 per cent year over year, showed evidence of a foreign exchange effect, Mr. Buchanan said.
The weak currency also helps to explain outperformance by the Canadian materials sector, which, weighted by market cap, has led the index with a 12.3-per-cent gain year to date. And most of the sector's big winners over that time are gold miners.
But the many sources of investment demand, or lack thereof, for gold, make it difficult to say whether gold mining stocks could continue leading the TSX, said Ryan Bushell, a portfolio manager at Leon Frazer. Gold may have been influenced by the appetite for safe havens, by investors looking for alternatives to energy, by a retracement from low valuations, by competitive devaluations of currencies and by fears of deflation. "There have been some central bank surprises," Mr. Bushell said. "That gets people talking about gold."
Tim Shufelt