Mutual fund investors are on pace to sell Canadian stocks for the 10th straight quarter as slumps in shares from Detour Gold Corp. to BlackBerry Ltd. weigh on the developed world’s third-worst performing equity market.
Canadians sold about C$780 million ($755 million) worth of domestic equity mutual funds in July and August, according to the latest data available from the Investment Funds Institute of Canada. Inflows into domestic funds last exceeded outflows in the first quarter of 2011. Canadian funds focused on U.S. holdings were the main beneficiary, taking in C$1.79 billion over the same two months.
“The bulk of the assets are going into non-domestic equities and it really speaks to our view that Canadian equities, for at least the balance of this year, will be a bumpy road forward,” said Shailesh Kshatriya, senior investment analyst with Russell Investments Group, in a phone interview from Toronto on Oct. 1. “Earnings momentum is not there in the domestic equity market and we’re likely not to see robust growth in the third quarter when the results come in.”
The Standard & Poor’s/TSX Composite Index has advanced 2.6 percent this year, trailing all 24 developed markets except Hong Kong and Singapore as global growth on pace for its slowest advance since 2009 restrains prices for commodities, including copper and gold. The benchmark equity gauge is headed for a third year of underperformance against the S&P 500, which has jumped 19 percent this year.
Year-to-date net redemptions of Canadian equity funds with at least 90 percent Canadian holdings stood at C$3.57 billion, compared with net sales of U.S. equity funds of C$5.17 billion. Investors have been selling more Canadian mutual funds than buying them annually since at least 2010, the data show.
“Given the U.S. market’s dramatic outperformance of Canada since 2011, and the proximity of Canada to the U.S., it doesn’t surprise us Canadian investors are getting more active with U.S. stocks,” said Brian Belski, chief investment strategist with BMO Capital Markets, in a phone interview from Toronto on Oct. 1. “Gold has really been hurting the Canadian markets in the first two quarters this year.”
Materials stocks, which made up 13 percent of the index as of yesterday, have plunged 30 percent in 2013, the worst decline among 10 industries in the S&P/TSX. Gold prices have slumped 21 percent this year as economic growth softened, reducing its demand as an inflation hedge.
Industrial metals such as copper and silver have fallen into bear markets as growth in China, the world’s largest consumer of raw materials, is forecast to slow to 7.6 percent in 2013, 7.4 percent in 2014 and 7.15 percent in 2015 from 7.7 percent in 2012, according to the average estimates of 57 economists surveyed by Bloomberg. Global growth this year is forecast to advance 2 percent, the weakest since a 2.4 percent contraction in 2009, according to forecasts compiled by Bloomberg.
“The Canadian market going forward will be contingent on global growth outlooks, and developed markets like the U.S. still look more consistent than global growth in general, especially emerging markets,” Belski said.
Nine of the 10 worst-performing stocks in the S&P/TSX this year are mining companies.
Detour Gold, the mining company backed by hedge-fund manager John Paulson, has posted the biggest decline in the index, tumbling 66 percent this year through yesterday.
“Detour Gold is ramping up a mine in an environment where the gold price is falling,” Laurie Gaborit, a spokeswoman with the company said in a phone interview from Toronto. The company on Aug. 14 forecast gold production of 270,000 ounces in 2013, the lower end of its previous estimates, Gaborit said.
BlackBerry, the struggling smartphone maker seeking to sell itself, was the third-worst performing stock in the S&P/TSX in the third quarter, plunging 27 percent. BlackBerry, based in Waterloo, said Sept. 23 it had agreed to a tentative $4.7 billion deal to sell itself to a group led by Prem Watsa’s Fairfax Financial Holdings Ltd., the company’s largest shareholder.
BlackBerry also reported disappointing second-quarter earnings and said it would cut about 4,500 jobs.
Bob Decker, a fund manager with Aurion Capital Management in Toronto, said his firm benefited from a rally in Air Canada, one of his biggest holdings outside of the banks.
“We knocked it out of the park,” Decker said. “It had been pretty dark days for the past few years until this most recent quarter.”
The nation’s largest airline, Air Canada gained 47 percent in the latest quarter and is up 157 percent this year, making it the best-performing stock in the index.
Air Canada said yesterday its third-quarter adjusted net income will be higher than last year, and reported third-quarter load factor of 86.2 percent, in line with a record 86.3 percent in the same period in 2012. The stock climbed 13 percent to C$4.49 at 4 p.m. in Toronto today, for the highest closing level since November 2008.
The company also reported better-than-estimated second-quarter earnings and was added to the S&P/TSX Composite on Sept. 20.
Craig Fehr, Canadian market strategist with Edward Jones & Co. in St. Louis, said domestic outflows from Canada into the U.S. will reverse themselves as the global economy recovers.
“The TSX is an area where you do want ample representation, particularly as we see an upturn in global growth, those sectors that have been pulling down the domestic index will start to become the leaders,” Fehr said. “Some of the trends occurring in Europe and in emerging markets in terms of stabilization, that should be reflected in globally cyclical, resource-sensitive names and the TSX is uniquely positioned for that.”
The turn may have already begun as the S&P/TSX rallied 5.4 percent in the third quarter, the best return since the quarter ended Sept. 30, 2012, as crude oil gained amid tensions in Syria, Kshatriya said.
Earnings for the S&P/TSX are forecast to jump 9.5 percent to C$870 at the end of 2013, according to the average estimate of four strategists surveyed by Bloomberg.
Anish Chopra, fund manager with TD Asset Management Inc., said the Canadian market is unlikely to break out soon from its middling performance relative to the U.S. as past sources of strength, including a run-up in commodities on emerging market growth and a boom in the housing market driving bank earnings, have largely run their course.
“The U.S. has certain factors which are in the earlier innings, such as housing, the auto sector, energy production,” Chopra said. His firm manages about C$216 billion. “In Canada, our factors are in the later stages.”
The best of the gains for the S&P/TSX may already be past. The index is forecast to end at 12,783 points by the end of 2013, little changed from yesterday’s close of 12,735.12, according to the average estimate of six strategists surveyed by Bloomberg.