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A truck hauls a load at Teck Resources Coal Mountain operation near Sparwood, B.C.The Canadian Press

Canadian raw materials stocks are having their best start to the year in at least three decades. Some analysts say the rally is missing a fundamental underpinning – economic growth.

A gauge of the country's largest raw-materials companies including gold, copper, lumber, and fertilizer producers soared 41 per cent through May 16, the best year-to-date performance since at least 1988, according to data compiled by Bloomberg. The rebound comes after materials stocks slumped 23 per cent in 2015, capping a record five-year decline in which the gauge lost 63 per cent of its value.

"I've got three words for you: Dead. Cat. Bounce," said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc. in Toronto. His firm manages about $8.2-billion. "There is no fundamental long-lasting recovery in the commodity space without global demand growth shifting course and accelerating, and that's just not in the cards in the foreseeable future. It's completely overbought at current levels and I wouldn't draw any comparisons to the past."

The rally in the S&P/TSX materials index, which includes companies such as Teck Resources Ltd. and Barrick Gold Corp., has helped drive the broader S&P/TSX composite index up 6.8 per cent this year, the second-best performing developed market after New Zealand.

Previous rebounds

The closest rally to the current one was a 29-per-cent increase over the same time period in 1993 as the Canadian economy rebounded from recession. The index also rose 28 per cent through May 10 in 2006, the second of three straight years of economic growth above 12 per cent in China.

In both cases, materials stocks extended gains. They ended the year 38 per cent higher in 2006 and climbed a record 62 per cent in 1993 – the two highest annual increases data going back to 1988.

"When I look at 1993, we were coming out of recession, we saw full percentage points of growth that we will not see this time," said Stephen Lingard, portfolio manager with Franklin Templeton Solutions in Toronto. Parent company Franklin Resources Inc. manages about $747-billion (U.S.) globally. "The unprecedented monetary policy extended to markets has put a floor under growth, but we haven't been able to grow anew."

Earnings comparison

Canadian resource stocks have rebounded in the wake of price rallies in everything from gold to copper as China, the world's second-largest economy, has shown glimmers of stabilization and the U.S. dollar has dropped. The price increases have boosted profit. Among the 44 companies in the materials index that have filed results during the reporting period, 68 per cent beat analysts' expectations versus 50 in the previous period, data compiled by Bloomberg show.

Still, the stocks are trading at about 96-times earnings, compared with about 30-times over the past 10 years, data compiled by Bloomberg show. Global growth is forecast to advance 3 per cent this year, the slowest since a 0.1 per cent decline in 2009, according to the average of analysts' forecasts compiled by Bloomberg.

ETFs amplify

Tom Caldwell, chief executive officer of Caldwell Securities Ltd., remains optimistic materials stocks have more room to run and believes in the "Buy Canada" story.

"Frankly the economies are doing reasonably well," said Mr. Caldwell, whose firm manages about $1-billion (Canadian), including positions in Teck, a base metals and coking coal producer, and Barrick, both among the best-performing materials stocks in the S&P/TSX this year. "People love to talk the story that we're not doing well, but in fact economies are growing and inflation is slow. The China story, everybody likes to gang up on China. We're seeing now China is getting better."

Mr. Caldwell laments the changes he's seen in markets since 1993, when trading was more straightforward.

"The markets don't react the same way they used to," Mr. Caldwell said. "We've created vehicles that amplify change. We have ETFs, and they allow people to pile on. You have so many side bets amplifying news and very little advice. It's adding to the changes in the stock market, but I don't care. It's just more ammunition for me."

Short interest

Investors aren't overly concerned about the rally, the data show. About a third of the stocks in the 45-member materials index have short interest positions of at least 5 per cent of their free float, little changed since 2014, according to Markit data compiled by Bloomberg. Labrador Iron Ore Royalty Corp. leads the list with 29 per cent short interest, the figures show.

Bets are piling up against gold producers, however. Net inflows into the double-leveraged Horizons BetaPro S&P/TSX Global Gold Bear Plus ETF have reached about $70-million this year. The fund's market capitalization touched $60-million, quadruple the ETF's market value from a low in January as the price of gold has surged 20 per cent.

The fact that nobody expected or believes that materials prices can go up is what gets you this " 'Face-ripping' rebound," said David Wolf, a fund manager with Fidelity Investments, in Toronto.

"My instinct as an investor tends to be contrarian, when everybody hates something that's probably not a bad place to be and that has been the case in materials," Mr. Wolf said in an interview. "But the economist and fundamental analyst in me looks at the situation and says you know what? Consensus is probably right on this one."