- Short positions, put-to-call ratio signal continued angst
- Toronto is a proxy for commodities, `like it or not'
Pessimism remains acute over the outlook for Canada’s largest stocks, with derivatives traders raising their bets that August’s turmoil in global equity markets will continue.
Short positions have more than quadrupled since the beginning of 2015 and the ratio of put to call options remains elevated in the C$9.5 billion ($7.2 billion) iShares Standard & Poor’s/TSX 60 exchange-traded fund, according to data compiled by Bloomberg. The largest ETF in Canada tracks the performance of the biggest and most liquid equities in the Toronto Stock Exchange, from Suncor Energy Inc. to Teck Resources Ltd. Commodity producers make up about 27 percent of the gauge, second only to financial services.
“The hedge funds are saying the best days are behind us,” said Hans Albrecht, an options strategist at Horizons ETFs Management Canada Inc. in Toronto. His firm manages about C$4.65 billion in ETF products. “I tell our clients in markets you buy the story and if the story isn’t good it’s not a great place to be. That’s what these bets are about.”
Investors are souring on Canada as S&P/TSX 60 stocks slumped 4.6 percent in August, the worst monthly performance since May 2012, joining a global selloff in equity markets as oil sank to 2009 lows and economic data spurred concern growth in China is slumping. While the ETF has bounced off its lows it remains down 7.4 percent this year. The S&P/TSX Composite index, the country’s main equity gauge, rose 0.6 percent to 13,431.03 at 11:52 a.m. in Toronto to snap a two-day slide. The index lost 8.7 percent through Sept. 14 for the third-worst performance among 24 developed-world stock markets.
China is Canada’s second-largest trading partner after the U.S. and among the world’s largest consumers of natural resources, making the S&P/TSX particularly vulnerable to continued weakness.
“Our materials and energy are definitely weak and that’s the trade: sell Canada and continue to be bearish,” said John Stephenson, chief executive officer at Stephenson & Co. Capital Management in Toronto. “Insurance is a part of the story but the majority of people are just nervous. Another shoe will drop.”
Stephenson’s firm manages about C$45 million and has shorted the iShares S&P/TSX 60 ETF in the past. He’s currently shifted his attention to shorting individual S&P/TSX 60 resource companies including Canadian Natural Resources Ltd., Teck and Encana Corp.
Jay Averill, a spokesman for Encana, Chris Stannell at Teck and management at Canadian Natural Resources declined to comment.
There were about 1.38 million open interest put options in the iShares S&P/TSX 60 ETF as of Sept. 11, compared with only about 139,000 call options, for a put-to-call ratio of about 10, the data show. Puts give investors the right to sell securities at a set price while calls allow the investor to buy. The ratio spiked to about 31 times in July, from a 2015 low of 5.6 in February, as the slide in crude accelerated.
Short interest in the ETF, meanwhile, has surged almost five-fold to about 14 percent of shares outstanding, compared with about 3 percent at the beginning of the year, Markit data show.
“The last six months, it has been a dangerous game trying to time the bottom,” said Kash Pashootan, a fund manager at First Avenue Advisory of Raymond James Ltd. in Ottawa. His firm manages about C$225 million. “No one knows at what point oil prices will rise. One of the main drivers is oversupply and until we see evidence cuts have had an impact on daily output we want to stay away.”
Barry Schwartz, a fund manager at Baskin Wealth Management in Toronto, said he doesn’t use derivatives. “We prefer to think long-term and act as fundamental analysts,” he said.
If stocks fall and the fundamentals don’t change, they actually become less risky and more attractive as their prices come down, Schwartz said. He sees opportunities in several industries including the big lenders, especially National Bank of Canada and Toronto-Dominion Bank, and telecommunications providers including Rogers Communications Inc. and Telus Corp.
The S&P/TSX Financials Index is down 7.8 percent in the broader gauge this year amid worries about the effects of the oil rout on corporate and consumer borrowing.
“It wouldn’t take very much to turn the TSX around,” Schwartz said. “I see a lot of terrific fundamental value in a lot of sectors that wouldn’t be impacted if Canada stayed in a recession for an extended period of time.”
For Stephenson, Canadian equities will remain under pressure as non-resource industries are still dwarfed by natural resources.
“Toronto is a proxy for commodities, that is our market like it or not,” Stephenson said. “We are very skeptical of energy and materials companies. This becomes a call if you think the other shoe drops today or in a month and I do think China’s shoe will drop. The reality is China is today’s problem.”