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The pitiful performance of the TSX vs. the rest of the world appears set to continue – The Globe and Mail – Jan 25 2018

Thursday, January 25, 2018

The Canadian stock market is losing at its own game.

The invigorated global economy is fuelling a synchronized rise in equity prices that has excluded few markets.

Canada is one big exception.

Major indexes in the United States, Europe, Asia and emerging markets have posted double-digit gains, or close to, over the past two months alone, while the S&P/ TSX composite index is little better than flat over that time.

That’s doubly discouraging for domestic shareholders as the Canadian stock market, steeped as it is in natural resources, is supposed to be well-positioned for stock rallies based on improving global growth. There are a host of reasons Canadian stocks are badly lagging behind the rest of the world. Tensions surrounding the North American freetrade agreement renegotiations, the lack of energy pipeline capacity and the shortage of domestic tech and health-care stocks in the index are all likely contributors.

But the main culprits, as always, are probably commodity prices, which have not yet taken their cue from the global economic expansion, Bank of Montreal chief economist Doug Porter said.

“It is often late in the economic cycle that you get the upswing in commodities, but it’s been a mild uptick so far.

Even the rebound in oil hasn’t really helped much,” Mr. Porter said.

And until commodities truly get on board, Canadian stocks are unlikely to close the gap in price performance.

While that gap has widened over the past couple of months, domestic stocks have been comparatively weak for much longer than that.

Over the past year, the S&P/TSX composite index has increased in value by about 4 per cent. The S&P 500, meanwhile, has shot up by 25 per cent over that same time. The same goes for the MSCI all-country world index.

Over that time, global economic activity gathered momentum, giving rise to the dominant theme in investing in the later stages of 2017. According to International Monetary Fund estimates, global output grew by 3.7 per cent last year, compared with 3.2 per cent in 2016.

As global central bankers have shifted their focus from continued accommodation to the start of stimulus withdrawal, some indications have emerged that the global economic cycle is entering its later stages. Those signals include early signs of inflationary pressures and a rise in long-term bond yields.

Pro-cyclical sectors, or those most closely tied to the general economy, typically flourish in a pro-growth rally.

And that’s just what has happened on a global scale over the past six months.

There are six sectors within the S&P 500 that have posted gains of at least 15 per cent since last July, all of which are generally considered cyclical: energy, materials, technology, consumer discretionary, financials and industrials.

The Canadian leaderboard looks much the same, albeit with lower returns. Canada is trailing U.S. performance in nearly every sector.

It is true that cyclical stocks are also holding up the domestic market. But not all cyclicals are created equal. Some of the hottest stocks in the world over the past several months have been U.S. tech names, of which the Canadian market is woefully short.

Canada’s cyclical strength is, in large part, based on resources. And while the global commodity complex has improved recently, price gains have not yet been sufficient to lift Canadian equity performance close to the global average.

The Bloomberg Commodity index, for example, has risen by 14 per cent since bottoming out last June. But that index is still 35-per-cent lower than it was in 2014 prior to the beginning of the crash in oil prices, and is off 50 per cent from the 2011 peak in global commodity demand.

Even oil has failed to elevate Canadian stocks recently. West Texas intermediate, the main benchmark for U.S. crude oil, rose to more than $65 (U.S.) a barrel on Wednesday for the first time in more than three years.

But a bottleneck in Canadian pipelines has made it difficult for some domestic energy producers to get their product to market. As a result, Canadian crude is now priced at a discount of more than 40 per cent compared with U.S. oil.

The pipeline crunch is partly attributable to temporary factors that should dissipate shortly, but a lack of new pipeline capacity could keep Canadian oil relatively cheap over the longer term, BMO’s Mr. Porter said.

All of which is standing in the way of the Canadian stock market becoming a leader of this particular pro-growth rally.

For stock pickers, however, the leadership of cyclical sectors shows no signs of stopping, said Robert Sneddon, president and chief portfolio manager at CastleMoore Inc. in Toronto.

“For the time being, the market is telling us that pro-growth is where we want to be,” Mr. Sneddon said.

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