Canada Stocks at Record as World’s Top Market After India

Canadian stocks have rallied to a record amid a resurgence in energy producers and gold mining shares, delivering investors the second-best returns among the world’s largest markets this year.

About $1.5 trillion in value has been restored to Canadian equities since March 2009, with the Standard & Poor’s/TSX Composite Index (SPTSX) gaining 100 percent. The S&P/TSX Composite closed yesterday at 15,109.25, topping the previous high of 15,073.13 reached six years earlier on June 18, 2008. It is up 11 percent this year, trailing only the 19 percent advance in India’s S&P BSE Sensex among the world’s 10 biggest markets.

The Canadian government’s June 17 approval of Enbridge Inc.’s Northern Gateway pipeline to British Columbia’s Pacific coast will potentially open up new markets for oil producers. As well, sectarian violence in Iraq, escalating tensions between Ukraine and Russia and the harshest North American winter in three decades have fueled concerns about energy supply and boosted oil and natural gas prices this year.

“It’s about time, is what I would say,” Barry Schwartz, fund manager at Baskin Financial Services Inc. in Toronto, said in a phone interview. His firm manages about C$700 million ($646 million). “It’s the resource stocks that had been sliced in half and are finally waking up.”

The S&P/TSX rose 2.56 points, or less than 0.1 percent, to 15,111.76 at 9:40 a.m. in Toronto, extending the record with a sixth day of gains.

Oil, Gold

Raw-materials producers plunged 49 percent in the previous three years for the worst performance among 10 industries in the S&P/TSX. Energy stocks lost 7.1 percent in that time as the price spread between local Western Canadian Select oil widened to record levels against global benchmarks, hurting profits for local producers.

Oil producers and mining companies have since rallied 20 percent and 13 percent this year respectively, the top two performers in the S&P/TSX. Detour Gold Corp. (DGC), the worst stock in 2013 as gold slumped the most in more than 30 years, has rebounded this year with a 239 percent advance. Gold prices have risen 6.4 percent in 2014.

Natural gas producers Birchcliff Energy Ltd. and Crew Energy Inc. have jumped more than 77 percent this year after frigid weather stoked demand for gas to heat homes and businesses in the Northeast and Midwest. Natural gas futures have surged 44 percent since Aug. 9.

A year after U.S. stocks surged to a record, Canada has caught up. Foreign investors are pouring cash into equities and the weakening Canadian dollar is helping earnings for exporters, such as New Gold Inc. and Osisko Mining Corp.

Taking Longer

“The comeback has taken longer due to our exposure to resources,” said Gareth Watson, vice president of investment management and research at Richardson GMP Ltd. in an interview. His firm manages C$28 billion.

The Canadian benchmark took more than 63 months to climb from its March 2009 low and surpass its pre-crisis high. The S&P 500 Index achieved the same feat in less than 49 months.

Shares of Valeant Pharmaceuticals International Inc., the Laval, Quebec-based drugmaker, have soared almost 900 percent since 2009 amid an acquisition spree including an $8.7 billion purchase of eye-care firm Bausch & Lomb Inc. and its continued $54.2 billion hostile pursuit of rival Allergan Inc.

Canadian stocks aren’t likely to rise much further because the global economy isn’t strong enough to drive commodity prices higher, according to Sadiq Adatia, chief investment officer at Sun Life Global Investments Inc. The World Bank cut its global growth forecast earlier this month amid weaker outlooks for the U.S., Russia and China.

Hard Time

“The TSX will have a hard time keeping its gains as the fundamentals in Canada are not strong,” Adatia said in a phone interview. His firm manages C$8.1 billion. “Because they have such high levels of debt, the Canadian consumer can’t sustain the economy.”

Canadian household debt levels climbed to a record 164.2 percent of disposable income in the third quarter last year, according to data from Statistics Canada.

Valuations are at a three-year high, with the benchmark equity gauge trading at a price-to-earnings ratio of 20.2, according to data compiled by Bloomberg.

The S&P/TSX has risen almost twice as much as the S&P 500 this year, helping attract international investors looking for better returns. Foreigners bought C$3.64 billion in shares during April, an eighth month of purchases and the most since November, according to data from Statistics Canada.

Profit Outlook

Earnings are forecast to continue improving. Per-share profit for companies in the S&P/TSX will probably rise 26 percent in 2014, according to analyst estimates compiled by Bloomberg.

Profits are being helped by declines in the Canadian dollar, which are making domestic goods cheaper compared with competition from abroad. The currency has fallen 2 percent this year against the U.S. dollar, reaching the lowest level since 2009 in March.

New Gold, Osisko Mining and oil producer Canadian Natural Resources Ltd. cited the exchange rate for reducing costs or boosting profit in the first quarter. The Canadian economy will expand 2.2 percent this year and 2.5 percent in each of the following two years, economists predict. Those would be the strongest growth rates since 2011.

“As long as the economy is rising, earnings go higher, it’s a fertile environment for increasing stock prices,” said Schwartz at Baskin Financial. “There seems to be in our minds no end to this rally in sight.”

To contact the reporter on this story: Eric Lam in Toronto at elam87@bloomberg.net

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

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