In a year when returns in the world’s biggest stock markets are diminishing after a blockbuster 2013, Canadian equities are on fire.
The Standard & Poor’s/TSX Composite Index is up 6.6 percent this year, more than double the gain in benchmarks for the U.S. and Europe and compared with losses in Asian markets. The gauge has soared 23 percent from a low reached in June 2013 and risen over the past 10 months, the longest winning streak in three decades. After accounting for volatility, the index ranks first among the world’s 10 largest equity markets over the past year, the BLOOMBERG RISKLESS RETURN RANKING shows.
Oil producers and mining companies led the advance after natural gas reached an almost six-year high, gold rebounded and a bidding war for Osisko Mining Corp. spurred takeover speculation among other metal producers. Economic growth in Europe and the U.S. will be enough to offset the slowdown in China and support commodity prices, according to Stephen Lingard, a fund manager at Franklin Resources Inc. in Toronto.
“It doesn’t feel like we’ve done much, then all of a sudden you see you have five or six percent gains in your portfolio and that’s not bad,” said Greg Eckel, a fund manager at Morgan Meighen & Associates Ltd. in Toronto. His firm manages about C$1.4 billion ($1.28 billion). “It’s steady as she goes in Canada, so this is a good place to be.”
The S&P/TSX added 52.53 points, or 0.4 percent, to 14,577.72 at 10 a.m. in Toronto for a second day of gains.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, and gives a measure of performance per unit of risk. Higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The S&P/TSX has returned 2 percent on a risk-adjusted basis, according to data compiled by Bloomberg. Historical volatility, a measure of past price swings, was 9.2 as of May 20. That compares with 27.2 for Japan’s Nikkei 225 Stock Average, the gauge with the biggest fluctuations.
Growth in the global economy will help the Canadian equity benchmark extend gains from a six-year high, said Lingard at Franklin Resources. Worldwide gross domestic product is forecast to increase by 2.8 percent in 2014 and 3.1 percent in 2015, the fastest pace in five years, according to economist estimates compiled by Bloomberg.
“I wouldn’t bet against Canada,” Lingard said in a May 9 interview. Franklin Resources manages $887 billion. “We’re getting back to more normal trend growth in the U.S., and that’s going to lift other markets, certainly Canada.”
The low volatility and 10-month equity advance in Canada is an anomaly that isn’t going to persist unless the domestic economy improves, according to Shailesh Kshatriya, senior investment analyst at Russell Investments Group in Toronto. Canada has alternated between gaining and losing jobs in the past six monthly employment reports, the first time this has happened since 2005, data compiled by Bloomberg show.
“The easy money’s been made,” Kshatriya said in a May 9 interview. “We need to see the economic data be more positive.”
Shares of raw-materials producers, which slumped 50 percent in the past three years, have added 8.3 percent this year. The industry is posting the third-biggest gain in the S&P/TSX, behind a 12 percent advance in energy stocks. Osisko is up 72 percent in 2014 after Agnico Eagle Mines Ltd. and Yamana Gold Inc. agreed to buy the company for about C$3.8 billion. Bullion futures have increased 7.7 percent after plunging the most in 31 years in 2013.
Natural gas producers Birchcliff Energy Ltd. and Crew Energy Inc. have jumped more than 55 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 41 percent since Aug. 9.
“A lot of good things are happening,” said Irwin Michael, who helps manage about C$900 million at ABC Funds in Toronto. “Mining and energy had been scraping bottom, so if the economy is improving, these two sectors should do better.”