Canadian stocks are rallying the most in three years, pushing the benchmark equity index to the highest level since 2011, as economic growth accelerates and gold rebounds from its worst year in more than three decades.
The Standard & Poor’s/TSX Composite Index climbed 18 percent since the end of June, the biggest advance over similar time periods since April 2011, according to data compiled by Bloomberg. The gauge closed at 14,001.65 yesterday, compared with its bull-market peak of 14,270.53 on April 5, 2011. It is still 7.1 percent below its record in June 2008.
Companies from Encana Corp. to OceanaGold Corp. are fueling the gains after earnings beat analysts’ estimates and an acceleration in U.S. and U.K. growth led the International Monetary Fund to raise its global growth forecast. A rebound in bullion following its worst annual return since 1981 sent a gauge of 23 gold companies in the benchmark gauge up 26 percent this year.
“It’s been a very bifurcated market in Canada for some time, with the resource portion of the market suffering and the non-resource side doing quite well,” Jeff Young, chief investment officer of NexGen Financial Corp. in Toronto, who oversees about C$900 million ($820 million), said in a phone interview. “For the Canadian market to outperform you need both sides.”
Canadian stocks are beating American equities at the start of a year for the first time since 2010, with the S&P/TSX up 2.8 percent versus a 1 percent drop for the S&P 500 Index. At the same time, the Canadian dollar is trading near a four-year low after Bank of Canada Governor Stephen Poloz said he’s concerned inflation is too low. Priced in dollar terms, Canadian stocks are down 0.4 percent this year.
Banks and other financial firms account for 34 percent of the S&P/TSX. Energy and raw-materials shares, which move with the prices of commodities, make up another 38 percent. Last year, financial companies climbed 19 percent, compared with a 31 percent drop in materials stocks, as gold fell 28 percent and silver lost 36 percent. Nine of 10 industries have gained since June, led by health-care stocks, technology companies and industrial shares.
Gold has rebounded from last year’s plunge, climbing 8.1 percent in 2014 as demand for coins, jewelry and bars increased. Of the 241 S&P/TSX companies, 23 are gold producers and sellers that together account for more than C$100 billion in market value, data compiled by Bloomberg show.
An improving outlook for government finances is also helping the nation’s equities. Canada Finance Minister Jim Flaherty’s latest budget projects almost C$45 billion in surpluses over four years beginning in 2015, giving Prime Minister Stephen Harper cash to potentially stimulate the economy through increased spending and tax cuts. The budget, presented Feb. 12, forecasts a budget surplus of C$6.4 billion in 2015, following seven straight deficits as the nation weathered a global recession and economic downturn.
Canadian stocks have gained this year as companies posted fourth-quarter earnings that exceeded analyst projections by 110 percent, data compiled by Bloomberg on the 77 corporations that have reported so far show.
Encana, the nation’s largest natural gas producer, has rallied 8 percent this year, almost three times the S&P/TSX’s gain. The Calgary-based company reported quarterly earnings that beat analysts as it raised oil and liquids output.
OceanaGold is up 111 percent since the Canadian market began rebounding from its 2013 low on June 24. Third-quarter earnings for the Australian producer with mines in New Zealand and the Philippines exceeded analyst forecasts, the company said in October. It’s scheduled to report fourth-quarter results on Feb. 20, with analysts predicting a 31 percent increase.
Shares of Valeant Pharmaceuticals International Inc. doubled last year as Canada’s largest drugmaker made more than $9 billion in acquisitions. The stock climbed 13 percent on May 24, the day a person familiar with the negotiations said it was close to buying Bausch & Lomb. The stock is up another 25 percent in 2014.
The global economy will grow 3.7 percent this year, up from an October estimate of 3.6 percent, the IMF said in revisions to its World Economic Outlook released in Washington Jan. 21, citing accelerating expansions in the U.S. and U.K. Canada will expand 2.3 percent this year, up from 1.8 percent in 2013, according to the median estimate of economists surveyed by Bloomberg.
Canadian stocks haven’t kept up with their American peers for the last three years, data compiled by Bloomberg show. Since the bull market began in March 2009, the S&P 500 has rallied 170 percent, twice the S&P/TSX.
Even with smaller gains, the Canadian equity index is more expensive. It trades at 18.6 times reported earnings, 9.8 percent more than the S&P 500’s multiple of less than 17. The spread between the countries’ valuations has surged since June, reaching the widest since October 2011 earlier this month.
Strategists estimate the S&P/TSX, which had the 30th worst 2013 return of 94 country indexes priced in U.S. dollars, will fail to surpass the S&P 500 again this year. They forecast the index will climb 3.5 percent to 14,104 for all of 2014, according to the average of six forecasts compiled by Bloomberg. That compares with an average projection for the U.S. equity index to rally 5.8 percent during the year.
“Investors tend to extrapolate the most recent trend onto the current and future trend, and that’s the real problem with looking at the Canadian market right now,” Brian Belski, BMO Capital Markets Corp. chief investment strategist, said by phone Jan. 23. “You need to see earnings growth come in.”
Belski is calling for the S&P/TSX to fall to 13,575 this year.
The S&P/TSX will be able to keep climbing so long as the U.S. continues to expand faster and China keeps up its pace of growth, said Matt Skipp, chief investment officer with Sw8 Asset Management Inc. in Toronto. The U.S., the world’s largest economy, will grow 2.9 percent this year, up from a forecast of 2.6 percent in January, economist estimates compiled by Bloomberg show. The Chinese economy will expand 7.4 percent in 2014 after a 7.7 percent growth in gross domestic product last year, estimates show.
“Canada is heavily dependent on China and the United States,” Skipp, whose firm manages about C$40 million, said in a Jan. 21 phone interview from Toronto. “For this rally to continue, there has to be a real economic recovery in the United States and some kind of market for commodities, globally.”