Plunging commodity stocks led by Iamgold Corp. (IMG) are overshadowing gains by seven out of 10 industry groups in Canada’s top equity index as companies from Valeant Pharmaceuticals International Inc. to Telus Corp. (T) benefit from better prospects for earnings and dividend growth.
A 27 percent slump in raw-material stocks has dragged the benchmark Standard & Poor’s/TSX Composite Index down 2.5 percent this year through yesterday, compared with a 10 percent gain in the S&P 500. The sub-index has fallen for the past five months, the longest retreat since 1990, amid concern the Chinese economy is slowing and as gold’s status as a safe haven diminishes. Among advancing groups, health-care leads with a 22 percent gain while technology shares are up 14 percent.
“We have the tale of two markets,” Anish Chopra, fund manager with TD Asset Management Ltd. in Toronto, said in a phone interview last week. His firm manages about C$204 billion ($200 billion). “You have some areas that are trading at all- time highs whereas other areas like commodities, the stock pricing is just getting adjusted to the new economic reality.”
The S&P/TSX Composite fell 1.4 percent to 11,947.16 at 4 p.m. in Toronto, its lowest close since November.
The rout in commodity stocks surprised analysts, who predicted a 33 percent gain in raw-material producers in the index at the beginning of the year, the most among 10 industries, according to share-price estimates compiled by Bloomberg. Projections for a rally in technology and health-care stocks have been more accurate.
Analysts have been too optimistic about China’s economic rebound and didn’t foresee a rush out of gold stocks as the metal entered a bear market, said Kash Pashootan, a fund manager with First Avenue Advisory at Raymond James Ltd.
China’s economy expanded 7.7 percent in the first quarter from a year earlier, figures showed on April 14. That compared with an 8 percent median forecast in a Bloomberg News survey and 7.9 percent in the prior quarter. China, the world’s biggest user of commodities, expanded last year at the slowest pace since 1999 after growing at an average rate of 11 percent in the previous 10 years.
The slump in raw-materials stocks, which make up 14 percent of the S&P/TSX, masked strength in other parts of the Canadian equity market. Five of the 10 industries in the S&P/TSX rallied at least 10 percent this year. Utility and energy stocks, the only other groups that fell, slipped no more than 1.5 percent.
Canadian equities have risen 0.7 percent in the past 12 months, worst among the 24 developed markets tracked by Bloomberg.
Mining analysts forecast copper would rise 2 percent in the first quarter and gold would increase 7 percent as growth picked up in China and central bank stimulus spurred demand for a protection of wealth, according to data compiled by Bloomberg.
Copper sank 4.9 percent in the first three months of this year for the first back-to-back quarterly drop since 2008 as China’s imports of the metal fell for a sixth straight month in March amid a waning construction boom.
Gold, which rallied a 12th straight year in 2012, has tumbled more than 17 percent this year as inflation worries ease and some Fed policy makers favor ending its third round of stimulus measures. The drop extended gold’s losses from the record close in August 2011 to 27 percent, more than the 20 percent that marks the start of a bear market.
Analysts remain most bullish on raw-materials producers, projecting them to rise 63 percent over the next 12 months, according to estimates compiled by Bloomberg.
Paolo Lostritto, an analyst with National Bank of Canada in Toronto, said gold stocks will rebound because monetary stimulus from the U.S., Japan and Europe will boost inflation in the long term, increasing the allure of the precious metal. He rated gold producers overweight, an equivalent of buy.
U.S. consumer prices fell for the first time in four months, dropping 0.2 percent in March after a 0.7 percent increase in February, the Labor Department said yesterday. The median forecast in a Bloomberg survey called for no change. The core measure, which excludes volatile food and energy costs, rose 0.1 percent, less than forecast.
“It’s the constant push and pull between the two elements, deflation versus inflation, and that’s why it’s so difficult to predict,” Lostritto said in a phone interview on April 15. “We think over time the inflation argument will bear fruit.”
Metal companies accounted for nine out of the 10 worst performers in the S&P/TSX this year. Iamgold has tumbled 56 percent to C$5.06 in 2013 as of yesterday as the Toronto-based company contends with higher operating costs and falling gold prices.
The percentage of analysts covering Iamgold with the equivalent of a “buy” rating has dropped to 33 percent from a high of 82 percent in July, while the average 12-month price target for Teck Resources has fallen 29 percent in the same period, data compiled by Bloomberg show. Iamgold and Teck are down 78 percent and 58 percent respectively from their record highs in 2011 respectively, as of yesterday.
Alana Duffy, a spokeswoman for Teck, declined to comment on the stock’s performance. Bob Tait, a spokesman for Iamgold, didn’t immediately reply to an e-mail seeking comment.
The decline has driven mining stocks to their lowest valuations since December 2008 relative to the S&P/TSX, as of yesterday. The group is trading at 12.5 times reported earnings, a 16 percent discount to the broad benchmark index, data compiled by Bloomberg show.
“We’re seeing an unwind of valuations and it depends on how bullish you are on the China story,” Pashootan, who helps manage about C$125 million at First Avenue, said in an April 11 phone interview from Ottawa. “Analyst expectations are not in my view fully pricing in that we’re talking about a major adjustment in GDP growth.”
Todd Johnson, a portfolio manager at Winnipeg, Manitoba- based BCV Asset Management, said he’s avoiding mining stocks and prefers companies with stable earnings and the potential to raise dividends, such as wireless carrier Telus Corp. and Magna International Inc. (MG), North America’s largest auto-parts maker.
“Cycle turns can be very painful,” Johnson, whose firm manages C$470 million, said by phone on April 10. “The nature of the commodity business is that profits can be very volatile and investor sentiment can amplify that volatility.”
Shares of Telus have climbed 8.4 percent in 2013, reaching an all-time high of C$71.47 on March 5, as the Vancouver-based company tapped the faster-growing economy of western Canada to add subscribers and boosted dividends every year since 2004. Shawn Hall, a spokesman for Telus, said the company will provide a forecast for its dividend, which currently yields 3.5 percent, at its annual investor meeting on May 9.
Tracy Fuerst, a spokeswoman for Magna, based in Aurora, Ontario, did not immediately respond to a phone message seeking comment on a potential dividend increase.
Magna is expected to raise its dividend as soon as February 2014, data compiled by Bloomberg show.
Companies in the S&P/TSX will boost earnings 12 percent to an all-time high of C$896.55 a share in 2013, analyst estimates compiled by Bloomberg show. That’s higher than the 10-year average growth rate of 11 percent.
Health-care companies rose the most this year, surging 22 percent, as Valeant (VRX) Pharmaceuticals, Canada’s largest publicly traded drug company, jumped 26 percent. The maker of Zovirax cold-sore cream and Kinerase skin conditioner this month increased its offer to purchase Obagi Medical Products Inc. by 22 percent to about $417 million, winning a bidding war over Merz Pharma GmbH for control of the U.S. maker of prescription skin-care products.
Laurie Little, a spokeswoman for Valeant, based in Montreal, could not immediately be reached for comment.
BlackBerry (BB), based in Waterloo, Ontario, rallied 21 percent this year, leading technology shares to a 14 percent increase. The company, which is attempting a comeback with a new lineup of smartphones, reported an unexpected quarterly profit on March 28 after embarking on a cost-cutting program last year. A spokeswoman with BlackBerry declined to comment.
Mining stocks will continue to underperform and an investor shift out of the industry will benefit other parts of the market, according to Jeff Burchell, a fund manager with Toronto- based Aston Hill Financial Inc.
“We’re in a middle of a sector rotation away from the commodity space and into good, old-fashioned industrial and consumer businesses,” Burchell, whose firm oversees C$6.74 billion in North America, said in a phone interview. “Canada has gotten used to the fact that commodity prices are high and that the world wants our commodities. My view is that we’re in a long period where those stocks don’t work.”
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