Canada Profit Decline Seen in Worst Market Since ’98

Canadian stocks are poised for their worst year since 1998 relative to global equities as a slowing economy weighs on commodities and analysts predict the first drop in corporate profits in three years.

The Standard & Poor’s/TSX Composite Index (SPTSX) dropped 1 percent this year, compared with a 7.9 percent gain for the MSCI World Index. The gap is the biggest over similar periods since 1998, according to data compiled by Bloomberg. The performance in Canadian shares this year has trailed all of the world’s 24 developed markets, except for Greece, Italy, Spain and Portugal.

“It will continue to lag,” Philip Petursson, who helps oversee $218 billion as managing director of the portfolio advisory group at Toronto-based Manulife Financial Corp. (MFC), said in a phone interview last week. “I don’t think we’re going to see a pickup in the global economy in the back half of the year.” Petursson said he’s “cautious” on Canadian gold and copper producers and has increased holdings of U.S. stocks.

Commodity companies, which make up about half the S&P/TSX, have tumbled this year as China, the world’s biggest consumer of energy and metals, expanded at the slowest pace since the financial crisis in 2009. Canada unexpectedly shed 30,400 jobs in July and the unemployment rate increased as the country’s retailers and wholesalers let go part-time workers.

Canadian stocks led in the first two years of the bull market as the global economy recovered from a recession triggered by the U.S. subprime mortgage crisis. The S&P/TSX jumped 31 percent in 2009 and 14 percent in 2010, beating gains of 27 percent and 9.6 percent respectively for the world index. The Canadian gauge trailed last year as Europe’s debt crisis intensified and China’s economy showed signs of a slowdown. The index fell 0.4 percent to 11,838.3 at 4 p.m. in Toronto.

‘Double-Edged’

“Our high exposure to commodities has been a double-edged sword,” Barry Schwartz, who helps oversee about C$450 million ($454 million) at Baskin Financial Services Inc. in Toronto, said in an Aug. 9 phone interview. “Investors have bailed out of commodities for now, as they focus more on the global and macro headwinds that are confusing and unnerving.”

Earnings at companies in the S&P/TSX may drop 3.3 percent this year to C$82.09 a share, according to analyst estimates compiled by Bloomberg. Among the 197 companies that have reported second-quarter results so far, profits have tumbled 21 percent. Overall income for the MSCI World index is expected to rise 8.3 percent in 2012, the data show.

Commodity Stocks

Raw-material producers in the S&P/TSX have dropped 13 percent this year, the worst performer among 10 groups. Barrick Gold Corp. (ABX), the world’s largest producer of the metal, this month touched the lowest level since 2008. The Toronto-based company in July reported profit that missed analysts’ estimates for a third straight quarter and said the estimated cost of building a mine in the Andes may jump at least 50 percent to about $8 billion. The gold producer will earn $4.23 a share in 2012, down 9.4 percent from a year earlier, analysts estimated.

Teck Resources Ltd. (TCK/B), Canada’s largest diversified miner, plunged 18 percent this year. The Vancouver-based company last month reported second-quarter profit that fell more than analysts estimated, hurt by a drop in prices for metallurgical coal, copper and zinc. Analysts expect the company to post a 29 percent decline in full-year earnings, a Bloomberg survey shows.

A gauge of technology companies tumbled 10 percent this year, led by a 46 percent drop in Research In Motion Ltd. (RIM) The Waterloo, Ontario-based BlackBerry maker in June posted a quarterly loss that was five times bigger than projected and said that it will delay the BlackBerry 10 phone release and cut 5,000 jobs.

Mortgage Restrictions

The S&P/TSX may decline as much as 10 percent over the next year should government measures such as tighter mortgage restrictions spur declines in housing prices, said Sadiq Adatia, who oversees about $12 billion as chief investment officer at Sun Life Global Investments in Toronto.

Canadian existing home sales decreased 1.3 percent in June, the second straight monthly retreat, the Canadian Real Estate Association said on July 16. Data last week showed the unemployment rate rose to 7.3 percent in July from 7.2 percent.

Near record-low mortgage rates have spurred borrowing by home buyers, pushing the ratio of Canadian household debt to personal disposable income to an all-time high of 154 percent in the first quarter. That exceeded the U.S. figure of 141 percent.

S&P last month cut the outlook for credit ratings to negative from stable on seven Canadian banks, including Toronto- based Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD), citing a prolonged increase in housing prices and consumer indebtedness.

’Meaningful Correction’

“A meaningful correction in real estate would have a severe impact,” Paul Taylor, chief investment officer at BMO Harris Private Banking, which manages about C$18 billion in assets, said by phone on Aug. 9 from Toronto. “The consumer is a meaningful part of the economy and that would be a major psychological deterrent for consumer behavior.”

Sprott Asset Management’s Charles Oliver said he’s bullish on Canadian shares after the decline pushed valuations close to the cheapest level since 2009. The S&P/TSX index is trading at 14.5 times reported earnings over the past 12 months, 3.9 percent below the multiple for the global equity gauge, according to data compiled by Bloomberg.

“Copper stocks, oil stocks, gold stocks -- they’ve all taken quite a beating over the past year so the valuations are quite attractive,” Oliver, a money manager with Sprott, said by phone on Aug. 8 in Toronto. His firm is part of Sprott Group of Companies, which has about $8.5 billion assets. “Two or three years from now, you’re going to say, ‘Why didn’t I buy more?’”

Gareth Watson, a vice president of investment management and research at Richardson GMP Ltd., said he expects Canadian stocks to continue trailing for the rest of the year because the country relies on a pickup in global demand for commodities and growth in China is decelerating.

China’s Economy

China’s economy expanded 7.6 percent in the second quarter, slowing from 8.1 percent in the previous three months, as demand for exports weakened amid Europe’s sovereign debt crisis and Premier Wen Jiabao’s efforts to cool consumer and property prices damped domestic consumption.

The International Monetary Fund last month projected that the world’s 10th largest economy will expand 2.2 percent in 2013, less than growth of 2.3 percent in the U.S., Canada’s biggest trading partner.

“We have to put things in context in terms of where the global economy is right now and where commodity prices are going,” Watson, who helps manage about C$15 billion at Richardson GMP, said in a phone interview on Aug. 9. “The broader global macroeconomic theme is not particularly healthy.”

To contact the reporters on this story: Eric Lam in Toronto at elam87@bloomberg.net; Lu Wang in New York at lwang8@bloomberg.net; Julia Leite in New York at jleite3@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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