The Standard & Poor’s/TSX Composite Index (SPTSX) has jumped 11 percent since June 28, on track for the biggest six-month advance since 2010. Energy and mining companies make up eight of the 10 biggest gains since June, with oil explorer Petrominerales Ltd. (PMG) surging 98 percent through yesterday. The nation’s lenders, including Royal Bank of Canada and Toronto-Dominion Bank, have reached records as housing data firmed.
The advance in Canadian shares represents a turnaround for one of the world’s worst-performing equity markets this year amid brighter prospects for China, the world’s largest consumer of copper and the second-largest of crude after the U.S. The prospect for extended monetary stimulus from the U.S. Federal Reserve and the Bank of Canada has stoked gold shares.
“China’s numbers are looking better, which is helping the base-metals complex,” said John Stephenson, a fund manager with First Asset Investment Management Inc. in Toronto. The firm manages about C$2.7 billion ($2.58 billion). “Banks haven’t disappointed, in fact they’ve been strong as the housing slump hasn’t materialized.”
Gross domestic product in China expanded 7.8 percent in the July to September period, the biggest quarterly gain since the fourth quarter of 2012, as Premier Li Keqiang implemented railway spending and tax cuts to jump start the economy.
The moves helped push copper futures 8.7 percent higher in the third quarter after three straight quarters of declines. The S&P/TSX Materials Index has rallied 9 percent since June 28.
“I don’t think this is a fleeting trend,” said Craig Fehr, Canadian market strategist with Edward Jones & Co., in a phone interview from St. Louis. “We’d seen the TSX lag since the latter part of 2011 as commodity interest has waned, and we’re seeing a little bit of a reversal of that now.”
The S&P/TSX gained 0.5 percent to 13,440.61 at 4 p.m. in Toronto for the highest close in two years. The index is on track to match an 11 percent gain in the four-month period ending Nov. 30, 2010, data compiled by Bloomberg show.
Teck Resources Ltd. (TCK/B), Canada’s largest diversified miner, has climbed 32 percent since June 28 while forestry company Canfor Corp. has rallied 15 percent.
Energy companies have advanced 8.6 percent over the same period amid the growing perception they are finding ways around the delay in TransCanada Corp. (TRP)’s proposed Keystone XL pipeline, First Asset’s Stephenson said. The $5.3 billion pipeline, connecting Alberta’s oil sands to the U.S. Gulf Coast, is awaiting a final environment impact statement from the U.S. State Department.
“We’re not just Keystone XL and nothing else now,” Stephenson said. “It’s starting to look like a better story. Energy has turned the corner, so that’s a huge plus.”
The mining and oil and gas industries account for about a combined 8 percent of Canada’s gross domestic product.
Producers have begun to move crude by rail. The capacity of rail terminals to load crude oil in Alberta and Saskatchewan will quadruple by the end of next year to 905,000 barrels a day, according to an Aug. 26 report by Calgary investment bank Peters & Co.
Petrominerales has soared 98 percent, the top energy stock in the benchmark equity gauge since June 28. The company agreed to sell itself to Pacific Rubiales Energy Corp. in September for C$935 million in cash. Petrominerales explores for and produces oil in South America, including Colombia and Peru.
Legacy Oil & Gas Inc. and TransGlobe Energy Corp., which have jumped 47 percent and 49 percent, respectively, since June 28, are among the best-performing energy stocks in the period.
Bank shares are also surging with the S&P/TSX Banks Index advancing 14 percent since June 28 to a record and on track for the best six-month performance since 2009.
Canadian home sales rose 0.8 percent in September for a seventh month of gains, according to data compiled by Bloomberg.
The Bank of Canada on Oct. 23 dropped language about the need for future interest rate increases, a move that will encourage more consumer borrowing in the near-term, said Sadiq Adatia, chief investment officer with Sun Life Global Investments in an interview from Toronto. His firm manages C$6.4 billion ($6.13 billion).
“The pressure on housing has been diminished a little bit, and even though consumers have high debt they’re not likely to see their rates go up any time soon either,” Adatia said. “It gives Canada a bit more room to maneuver.”
Royal Bank of Canada, the nation’s largest lender, exceeded C$100 billion in market value for the first time on Oct. 18 while peers including Toronto-Dominion Bank and Bank of Nova Scotia touched record highs on the same day.
Bob Decker, fund manager with Aurion Capital Management in Toronto, said the banks remain a stable, dividend-yielding investment. The firm manages C$6 billion ($5.74 billion).
“Canadian banks had been dismissed as a no-growth group vulnerable to a housing bubble collapse,” Decker said. “That story had become so pervasive it scared all the retail investors away. Now they’re coming back, saying ’where else am I going to put my money?’”
Gold producers Semafo Inc. (SMF) and Osisko Mining Corp. have rallied 90 percent and 56 percent, respectively, since June 28 as the likelihood of the U.S. Fed extending stimulus beyond 2013 has increased, Sun Life’s Adatia said. The metal is sometimes seen as an alternative store of value to equities and bonds during inflationary times.
“When we saw the Fed take tapering off the table, that’s when things really took off,” Adatia said.
Philip Petursson, director of institutional equities with Manulife Asset Management Ltd., said he prefers investing in U.S. and international equities, and is underweight in Canadian stocks. His firm manages about C$248 billion.
“This could just be a relief rally for Canada, given how far behind Canada has been,” Petursson said. “Some people believe Canada is oversold and cheap. I don’t share that belief, given the economic headwinds here.”
Stocks in the S&P/TSX are the most expensive on an annual basis since 2010, at 17.9 times earnings, the data show.
The Bank of Canada lowered its economic growth forecasts for 2013, 2014 and 2015 on Oct. 23, while maintaining warnings that Canadians are carrying too great a debt burden.
Brian Belski, chief investment strategist with BMO Capital Markets, on Oct. 1 raised his 2013 year-end price target for the S&P/TSX to 13,100 from 12,900 due to improving oil price forecasts. His 2013 target is the second-highest among six analysts’ estimates for the S&P/TSX, according to a Bloomberg survey. He sees the S&P/TSX ending 2014 at 13,575.
The top stock in the S&P/TSX since June 28 is Air Canada (AC/B), the nation’s largest airline, with a 121 percent return after cutting costs and reporting better-than-forecast earnings.
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