Canada’s benchmark Standard & Poor’s/TSX index is forecast to advance to 12,843 by the end of 2013, according to the average estimate of seven strategists surveyed by Bloomberg this month. That would be a gain of 5.9 percent since the end of June and 2 percent from current levels. Strategists project the Standard & Poor’s 500 Index to close the year at 1,677, slightly below yesterday’s close of 1,689.47.
The S&P/TSX rose 0.1 percent to 12,605.51 at 9:37 a.m. in Toronto today, headed for a two-week high. The S&P 500 gained 0.2 percent to 1,692.43.
“From a value perspective, a lot of bad news has been reflected in a lot of stocks and sectors in the Canadian market,” Michael O’Brien, a fund manager with TD Asset Management Inc. in Toronto, said by phone on Aug. 9. The firm oversees C$216 billion ($209 billion). “The banks and oil sector, it’s early days but they’re closer to the end of the process of working through people’s worst fears.”
Canadian stocks fell 2.5 percent in the first half of the year, compared with a 13 percent gain for the S&P 500, the largest half-year performance gap between the two indexes since 1998. The country’s top companies -- from Royal Bank of Canada (RY) to Barrick Gold Corp. (ABX) -- were hit by concern the country’s housing market was poised for a hard landing and by plunging gold prices. Oil stocks such as Suncor in the S&P/TSX fell to a five-month low in April amid discounts on the nation’s crude to world oil markets.
Fueled by slumping commodity prices, stocks underperformed even as Canada’s broader economy grew at par with the U.S. The nation’s economy is forecast to expand by 1.7 percent this year, compared with a 1.6 percent pace in the U.S., according to surveys of economists by Bloomberg.
While the S&P/TSX banks index fell as much as 7.7 percent between February and June amid data showing a slowing domestic housing market, stocks steadied this spring.
The total value of purchases in six major Canadian real estate markets rose 30 percent in July compared with the same month a year earlier, according to data compiled by Bloomberg News from regional real estate boards. Housing starts increased 11.9 percent on average over the past three months compared with levels recorded at the start of the year.
“People have been worried about consumer indebtedness and the housing market,” said O’Brien. “Only way you can grow out of that is every month goes by when bad things don’t happen, an accumulation of little positives that turn the tide of how people perceive the sector.”
The banks index rose 6.5 percent since touching a 2013 low on June 20.
Global crude prices have been gaining since April and trading above $100 a barrel since last month, as improving U.S. economic data buoy the outlook for global demand.
Canadian oil stocks have also been aided by the narrowing discount on Canada’s heavy oil grade, Western Canadian Select, in part on optimism that pipeline bottlenecks are easing. Western Canadian Select traded $22.75 below U.S. West Texas Intermediate oil yesterday, from a record $42.50 below WTI prices on Dec. 14.
“We’re not out of the woods yet but we’re edging towards greater comfort that if one specific pipeline isn’t a sure thing, people will find creative ways around it,” O’Brien said.
TransCanada Corp., Canada’s second largest pipeline company by market value, said Aug. 1 it plans to go ahead with a C$12 billion pipeline that will ship oil from Western Canada to the nation’s Atlantic Coast. The Energy East project would have a capacity of 1.1 million barrels a day and be in service by the end of 2017 for deliveries to Quebec and to New Brunswick in 2018, the Calgary-based company said.
The announcement comes as TransCanada’s Keystone XL pipeline from Alberta to the U.S. Gulf Coast remains in regulatory limbo as the U.S. government weighs approval.
Canadian oil stocks aren’t reflecting the better outlook, making them look cheap relative to peers, Brian Huen, managing partner with Red Sky Capital Management Ltd. in Toronto, said yesterday.
“There’s certainly an opportunity for the TSX to outperform here,” said Huen, who helps manage C$220 million at Red Sky Capital, citing Suncor, Canadian Natural Resources Ltd. (CNQ) and Bellatrix Exploration Ltd. (BXE) as stocks that may rise. “If oil prices remain stable at a high level, at some point people have to recognize these stocks are cheap.”
Huen said Canada’s underperformance has prompted his fund to consider adding the country’s stocks.
“We’re looking more in Canada because it’s underperformed so much so we might reweight our portfolio out of the U.S. a bit and back into Canada a bit more,” Huen said.
Canada’s benchmark index still may be on pace for one of its worst performances against the S&P 500 since the 1990s. Based on the average forecast of strategists, Canada’s index is due to rise 3.3 percent this year versus a 18 percent gain for the S&P 500. That would be the biggest performance gap since 1998.
Canadian mining companies such as Barrick Gold, which has plunged 46 percent this year, and Teck Resources Ltd., which has lost 22 percent, have lead declines amid falling metals prices. An economic slowdown in China, the world’s largest consumer of raw materials, has caused a bear market in commodities from copper to silver. China’s gross domestic product is projected by economists to rise 7.5 percent in 2013 and in 2014, the lowest annual gain since the Chinese economy grew 3.8 percent in 1990, data compiled by Bloomberg show.
Concerns about consumer debt and housing, a weak outlook for gold producers and “volatile” oil prices prompted Shailesh Kshatriya, a Toronto-based senior investment analyst at Russell Investments Group, to cut his year-end forecast for the index.
“As these are the three dominant sectors in the index, we are cautious on prospects for the TSX,” Kshatriya, whose 2013 estimate for the index is the lowest among the strategists surveyed, said in an Aug. 2 note. He predicts the index will end the year at 12,400.
There have also been fresh blows to the market. Telephone stocks including Rogers Communications Inc. (RCI/B), which have plunged since June amid speculation Verizon Communications Inc. will enter Canada’s telecommunications market.
The latest setback, just as the market rose 7 percent from its 2013 low at the end of June, came two weeks ago when Russia’s OAO Uralkali announced it would quit its marketing venture with a competitor and start selling potash at market prices. Shares of Potash Corp. of Saskatchewan Inc., the largest North American producer of fertilizer that had gained as much as 11 percent this year, have dropped 18 percent since.
Fund managers that are underinvested in Canada may be quick to return if evidence mounts that China’s economy has begun to stabilize and Canada’s commodity-heavy market becomes more attractive, Huen said.
“People are short, and a lot of funds are underweight, so just to get to a market weighting there will be a substantial amount of buying,” he said.
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