Canadian Stocks: Annus Horribilis

It’s been a lousy year for Canadian stocks. Just about everything that could go wrong has gone wrong. So what now?

Queen Elizabeth declared that 1992 was her “annus horribilis”. Canadian investors may feel the same about 2013 when all is said and done.

It seems that everything that could go wrong has gone wrong this year. As a result, the TSX has been one of the world’s worst performing stock markets with a year-to-date gain of only 1.7% as of the close on Aug. 15. By contrast, U.S. indexes have surged with the S&P 500 up 18.2% while the Dow has advanced 17%.

It’s been one bad news story after another for Canadian stocks since the start of the year. They have included:

The plunge in bullion. As the clock struck midnight last Dec. 31, the gold price stood at US$1,675.80 an ounce and was showing upward momentum. A target of US$1,900 for 2013 did not seem unreasonable. Instead, bullion fell off a cliff and was trading at US$1,327.30 at the time of writing, down more than 20% so far this year. A variety of reasons have been advanced for the plunge including a strong U.S. dollar, receding inflation fears, new tariffs in India, and relatively weak demand.

Gold mining companies, already under pressure as a result of rising costs and political and environmental problems, have fared even worse. The S&P/TSX Global Gold Index is down a mind-blowing 35.3% for the year and no major company has escaped the carnage. Panicky investors have further contributed to the debacle by dumping their shares in Barrick, Kinross, Agnico-Eagle, Goldcorp, and other miners.

The China slowdown. The loss of momentum in China’s growth rate has sent shivers through the entire investment world but nowhere has the impact been greater than on commodity prices. With the sole exception of oil, the prices of key commodities are off significantly so far this year. At the close of trading on Aug. 6, copper, which is considered an economic bellwether, was off about 12% so far this year. Nickel was down 18%, wheat 33%, lumber 17%, and canola 14%. Canada is a major producer of all these products so the impact on our resource and agriculture sectors is obvious. The S&P/TSX Capped Materials Index is down 25.1% for 2013.

Interest rate shock. Investors were stunned to see supposedly low-risk stocks and REITs plummet after interest rates spiked as a result of concerns that the U.S. Federal Reserve Board was about to cut back its quantitative easing program. Everyone knew that bond prices would be hurt by rising rates but investors and even some analysts were surprised by the impact on defensive stocks such as utilities. The pull-back contributed directly to the 13,2% year-to-date decline in the S&P/TSX Capped REIT Index and the loss of 9.7% in the Capped Utilities Index.

The spectre of Verizon. If there are any Canadian safe havens, they must be the telecoms, right? The oligarchy of BCE, Rogers, and Telus seemed to be on cruise control, with share prices steadily rising and dividend increases boosting investors’ cash flow. Then Ottawa opened the door to U.S. behemoth Verizon and the share prices of Canada’s big three (who together are about a quarter of the size of Verizon) tumbled. BCE is off about 13% from its May high, Telus has dropped about 18%, and Rogers is off 22% since April. And Verizon hasn’t even confirmed it’s coming yet!

The collapse of the potash cartel. A major Russian producer announced it was pulling out of one of the two world potash cartels and prices dove around the globe. One Russian trader was quoted by Reuters as saying: “It is as if Saudi Arabia decided to leave OPEC”. The share prices of the two major Canadian producers, Agrium and Potash Corp. were rocked. Potash Corp. lost $9.10 (about 23%) of its value in the two days after the news came out. Agrium is off 26% from its January high.

It’s not all bad news. The life insurers are rebounding, some of our tech companies are doing well (e.g. Constellation Software, MacDonald Dettwiler, CGI Group), the railroads have posted good gains, and the energy sector is finally in the black for the year.

But those are the few bright spots in an otherwise bleak landscape. The only consolation is that history has shown that no country or sector stays down forever. There will be a recovery. The unknown factor is when.


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