After a year of doldrums in the equities business, the first two months of 2014 have shown a remarkable turnaround as investors are once again snapping up new share sales and trading Canadian stocks at a pace not seen in more than two years.
In 2013, as equity markets in the U.S. soared and Canada's could not keep up, volumes stagnated on Canadian markets because investors shifted their interests elsewhere. A lack of interest in commodity stocks put the brakes on financing activity.
It was the second straight year of sluggish business on trading desks, putting immense pressure on securities firms that depend on selling stocks for their profits. Most small boutique investment banking firms that specialize in stock trading and offerings have been losing money. TMX Group Inc. also felt the pinch.
That has shifted quickly in the first part of 2014. Trading and financing activity have jumped sharply. Average daily volumes of 348 million shares on the Toronto Stock Exchange so far in 2014 are bigger than the averages set in the full years of 2013 or 2012. Companies are taking advantage of the new found interest in Canadian stocks to raise money for acquisitions and new business ventures.
What's changed? Canada is no longer a laggard. Many metals stocks staged a rally in January and February, as did natural gas producers, helping the TSX Composite Index to achieve its current status as the best performing equities index in North America so far in 2014.
That helped the TSX Composite Index to achieve its current status as the best performing equities index in North America so far in 2014.That feeds trading in existing stocks, and interest in new issues such as the $1.5-billion of subscription receipts that Baytex Energy Corp. sold in February to help pay for its $2.6-billion purchase of an Australian oil company with key assets in the U.S.
Gold companies have taken advantage of a surge in bullion prices past $1,300 (U.S.) an ounce to launch a string of equity offerings that refilled depleted coffers.
"Canada seems to be attracting interest around the globe again," said Doug Clark, managing director of research at trading firm ITG Canada Corp. "We are fielding more calls from European and American firms asking about Canada than we have in a while. A little volatility in gold markets and an uptick in natural gas prices are good for us."
In addition, Mr. Clark pointed to an increase in expectations for volatility. The implied volatility in S&P/TSX 60 options for months further out this year is trending higher. That is a good sign for traders, who make money when markets are bouncing around, though it is not always a boon to investors, Mr. Clark said.
Total trading volume in Canada rose 8.7 per cent in the first two months of the year from the same period in 2013, according to figures tracked by the Investment Industry Regulatory Organization of Canada.
TMX Group is seeing a lot more activity on its markets, which helps to feed its earnings. The company collects fees from trades, as well as when companies issue shares listed on the company's exchanges.
Trading volume in the first two months of the year on the Toronto Stock Exchange rose 8.6 per cent from the same stretch of 2013 to 14.3-billion shares. TSX Venture volume climbed 6.8 per cent.
Equity financings on the TSX have also taken a dramatic leap. Funds raised in January and February totalled $10.4-billion, almost four times the total in those months last year. TSX Venture Exchange financings were up as well, having risen 20 per cent to $760.4-million.
March may prove a more difficult month, as some metals prices have fallen off on concern about China's economic growth, after a report that exports from the country slumped. That could derail some equity sales, and push some investors to the sidelines.
Even so, unless business dries up this month, the pickup should be the most fruitful quarter for the equities business in Canada in some time. For firms that have been hanging on hoping for a real rebound, there is hope that, at last, it is at hand.