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-Norm Betts/Bloomberg

Canada's agonizing transition from its battered resource-based economy toward more diverse sources of growth appears to be gathering pace – at least in the stock market.

The biggest percentage of non-resource companies made it into the country's benchmark stock-market gauge in 2015 than in any year since at least the technology boom in 1998. Of the 16 new members (including trusts) added to the S&P/TSX composite index in 2015, most of them were non-resource companies – including top-performing stocks such as auto-parts supplier Uni-Select Inc., software company Enghouse Systems Ltd. and drug maker Concordia Healthcare Corp., according to data supplied by TMX Group.

The S&P/TSX also deleted 17 resource companies last year, or 77 per cent of all eliminations, the most since 2012, according to data compiled by Bloomberg from TMX. Companies are added or deleted to the composite index based on market capitalization, volume and liquidity. Each quarter, S&P Dow Jones Indices refreshes the index based on new share counts and sorts it by float and market cap, dropping companies that stray beyond the core and adding those that climb.

New drivers

Canada is groping for new growth drivers as the commodity-price collapse hammers the resource-heavy economy, leading to thousands of job and investment cuts in energy and mining. The transformation has been stymied by the manufacturing sector's seeming inability to pick up the slack amid competition from locales such as Mexico and China. About 10,000 exporting companies have closed their doors in Canada over the past decade, according to an estimate in a report last week by Credit Suisse Group AG.

Business creation in the wider economy has slowed. The number of non-resource businesses grew 0.6 per cent in the third quarter of 2015 from a year earlier, the lowest year-over-year increase in the quarterly data since the third quarter of 2013, according to preliminary data from Statistics Canada. Resource companies plunged 5.4 per cent in the third quarter of 2015 from a year earlier, the biggest decline since at least 2000.

The government needs to invest in business growth and innovation to foster more varied growth, Som Seif, chief executive officer at Purpose Investments Inc. in Toronto, said.

Narrow breadth

"Canada is a small economy, we don't have the depth of companies," Mr. Seif said. His firm manages about $1.8-billion. He added that Canada needs more broad, publicly traded firms. "So we need companies like Couche-Tard or Rogers to grow their business. It can't be a solo situation like Valeant."

The country's narrow stock market, where financials, raw materials and energy make up about 66 per cent of the S&P/TSX, is often swayed by companies that soar high and fall hard, such as Nortel Networks Corp. and BlackBerry Ltd. Valeant Pharmaceuticals International Inc. briefly eclipsed Royal Bank of Canada last year to become the country's largest company before stumbling amid questions over its drug pricing.

Large exposure to commodities has also meant investors in Canadian stocks have had a horrible start to the year. The index has plunged 8.2 per cent this year, joining a global equity rout as oil tumbles on concern a slowing Chinese economy will crimp global demand. Investors who scooped up stocks such as Uni-Select and Enghouse have been well rewarded, with those companies gaining 112 per cent and 50 per cent respectively over the past 12 months.

Play dead

Canada's economy has had a long track record of disappointing productivity growth and innovation, especially compared with the United States, Myles Zyblock, chief investment strategist at Bank of Nova Scotia's Dynamic Funds unit, said in an interview recently. His group manages about $110-billion. While Canada is hampered by inherent disadvantages such as a sparse population and constant competition from the much larger United States, Canadian businesses shouldn't be discouraged, he said.

"It doesn't mean we should lie on the floor and play dead," he said. "We may be small, but we're still underrepresented in those types of global leadership companies. We've had promising companies that for whatever reason fall a little short. We haven't figured it out yet."


S&P/TSX's non-resource shift

The vast majority of companies added to the S&P/TSX composite index in 2015 were non-resource companies.

Added in March:

  • Concordia Healthcare Corp. (CXR)
  • Performance Sports Group Ltd. (PSG)
  • ProMetic Life Sciences Inc. (PLI)
  • Pure Industrial Real Estate Trust (AAR.UN)

Added in June:

  • FirstService Corp. (FSV)
  • Computer Modelling Group Ltd. (CMG)
  • Enghouse Systems Ltd. (ESL)
  • Intertain Group Ltd. (IT)
  • Mitel Networks Corp. (MNW)
  • Seven Generations Energy Ltd. (VII)

Added in September:

  • Boyd Group Income Fund (BYD.UN)
  • Stella-Jones Inc. (SJ)
  • Tricon Capital Group Inc. (TCN)
  • Uni-Select Inc. (UNS)

Added in December:

  • Kinaxis Inc. (KXS)
  • New Flyer Industries Inc. (NFI)

Source: TMX Group Ltd.