Loblaws Surges as Canadian Staples Lead Amid Volatility

Bread and milk are topping investor shopping lists as grocers from Loblaw Cos. to Metro Inc. vault Canadian consumer-staple stocks to the top of the market for the first time since 2008.

The shift into companies selling essential goods comes as slowing economic growth in China and Europe send commodity prices tumbling and energy and materials shares to the bottom of the pack in the benchmark Standard & Poor’s/TSX Composite Index.

“Investors are looking for a little more value and a little less cyclicality,” Craig Fehr, Canadian market strategist at Edward Jones, said on the phone from St. Louis. His firm manages $858 billion globally. “All the pieces are still in place for the outperformance of equities, but there will be more rotations in the near term.”

Investors are cashing in after the S&P/TSX rallied 15 percent this year to an all-time high, selling positions in the oil and gold producers that propelled the Canadian market to the second-best performance in the developed world behind Denmark. The benchmark equity gauge dropped 1.2 percent in the third quarter, snapping four straight quarterly gains and now stands seventh against its global peers. It was down 1.1 percent to 14,645.17 at 10:41 a.m. in Toronto, the lowest since June amid a U.S. equities selloff.

“People are gravitating towards more stable” investments including retailers such as Loblaw and Alimentation Couche-Tard Inc., said John Kim, a fund manager at Toronto-based Aston Hill Financial Inc., which manages about C$7.5 billion ($6.7 billion). Kim holds shares of Dollarama Inc., Canada’s largest dollar-store operator, as well as clothing retailer Gildan Activewear Inc.

Acquisitions Boost

The S&P/TSX Consumer Staples Index jumped 12 percent in the third quarter, the biggest advance since 2010, and the first time it’s led the benchmark’s 10 main groups on a year-to-date basis since 2008. Brampton, Ontario-based Loblaw surged 18 percent in the quarter, Quebec-based gas and convenience store-operator Couche-Tard gained 23 percent in the quarter and Metro, also based in Quebec, advanced 14 percent.

Same-store sales growth is improving as grocers such as Loblaw and Empire Co., which operates the Sobeys chain, find cost savings after acquisitions and offer higher-margin items, said James Telfser, a fund manager at Aventine Management Group Inc. Telfser’s firm manages about C$80 million, including shares of Stellarton, Nova Scotia-based Empire and Clearwater Seafoods Inc.

“They’ve finally strung a couple good quarters in same-store sales growth, which is a signal for me to get back in,” Telfser said in an interview in the Toronto Bloomberg office.

Energy Slumps

Empire, which acquired the Canadian operations of Safeway Inc. for C$5.8 billion in November, said adjusted first-quarter earnings before interest, taxes, depreciation and amortization jumped 48 percent compared with last year primarily due to food retailing and the impact of Safeway operations and synergies.

The industrials group came in second in the third quarter with Canadian Pacific Railway Ltd. and Canadian National Railway Co. rallying at least 15 percent each as they benefit from shipping oil by rail and the U.S. economic recovery.

By contrast, energy stocks slumped 7.3 percent in the third quarter, the most since the second quarter of 2012, and gold producers plunged 17 percent in the same period.

Easing tensions in the Middle East, a rising U.S. dollar and increasing concern about the economic health of Europe and China have sent commodities prices plunging in the past three months. Crude in New York dropped 13 percent in the latest quarter, the most since the second quarter of June 2012, while gold fell 8.4 percent.

Metals Slide

Iron ore posted its third straight quarterly decline, a record string of losses, and nickel entered a bear market amid rising supplies as China’s economy sputters. Chinese growth is forecast to slow to 7 percent and 6.8 percent in 2015 and 2016, the lowest since 1990.

Canada’s gross domestic product unexpectedly stalled in July, short of median economists’ forecasts of a 0.3 percent advance, as oil and gas production dropped.

Investors are pulling out of Canada and looking back to the U.S. for better opportunities, Sadiq Adatia, chief investment officer at Sun Life Global Investments Inc., said.

“The best days of the TSX are long gone,” he said. His firm manages C$9 billion. “People who had initially jumped into Canada as the U.S. had done so well are starting to leave. Some are moving into cash as well.”

Best Over

The S&P/TSX is unlikely to post substantial additional gains, Adatia said, with U.S. economic growth forecast to outpace Canada’s in each of the next two years.

The U.S. economy will grow 3 percent and 2.9 percent in 2015 and 2016, respectively, according to the median estimate of economists surveyed by Bloomberg, compared with 2.5 percent and 2.45 percent for Canada, the data show.

“It will be hard for the TSX to stay above 10 percent” in gains, he said.

While the TSX may fall further in the coming months, the long-term prognosis for the Canadian market is still positive, said Lesley Marks, chief investment officer of fundamental Canadian equities at BMO Global Asset Management in Toronto.

“Where we think the market will find support is in the fundamentals,” she said. “When companies start reporting earnings, which will be good, the market will have more of a floor and people will remember why they own stocks.”