Mining stocks and commodity futures have become a popular trade among hedge funds looking to benefit from a China-led global economic recovery. This is certainly good news for the resource-intensive Canadian equity market, but there’s a less obvious TSX sector – capital goods – that has historically been more sensitive to global growth than commodities.
Developed world economies are dominated by services industries, but global manufacturing data are more indicative of economic cycles and therefore provide better guidance for equity investors. With this in mind, I compared the JPMorgan Global Manufacturing PMI, a composite index, with the 17 available TSX industry sectors as defined by the Global Industry Classification Standard (GICS).
Correlation calculations identified the performance of the S&P/TSX Capital Goods Index as the most similar to changes in global manufacturing activity. Perhaps surprisingly, the accompanying chart shows that capital goods tracked the manufacturing index much more closely than either energy or materials stocks.
capital goods: the sector to watch
S&P/TSX
Capital Goods
S&P/TSX
Materials
S&P/TSX
Energy
JPM Global PMI
Mftg. Index (right scale)
160
60
140
55
120
100
50
80
45
60
40
40
20
0
35
2011
2013
2015
2017
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: scott barlow; bloomberg
capital goods: the sector to watch
S&P/TSX
Capital Goods
S&P/TSX
Materials
S&P/TSX
Energy
JPM Global PMI
Mftg. Index (right scale)
160
60
140
55
120
100
50
80
45
60
40
40
20
0
35
2011
2013
2015
2017
2019
JOHN SOPINSKI/THE GLOBE AND MAIL
SOURCE: scott barlow; bloomberg
capital goods: the sector to watch
S&P/TSX
Energy
S&P/TSX
Capital Goods
S&P/TSX
Materials
JPM Global PMI
Mftg. Index (right scale)
160
60
140
55
120
100
50
80
45
60
40
40
20
0
35
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: scott barlow; bloomberg
To identify individual companies that are likely to benefit from the postpandemic economic recovery, the performance of each stock in the capital goods index since the 2020 market bottom on March 23 is listed in the accompanying table. They are ranked by market capitalization to reflect the stocks with the most effect on the index.
Engineering firm Badger Daylighting Ltd. is the top performer in the industry, more than doubling since March. Other stocks with a more than 50-per-cent surge from the bottom include Richelieu Hardware Ltd. (although in that case, domestic home improvement activity, not the global economy, is the driver), NFI Group Inc. and Finning International Inc.
The table is intended as a starting point for further research, not a recommended list of stocks. That said, with market history indicating that capital goods companies could very well be a better way to play a global economic recovery, further investigation might be well worth the effort.
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