Health Care Does Harm as Canada Stocks Approach Bear Market

  • Worst market in G7 as Valeant joins tumble in oil, metals
  • `Nobody wants to fight the tape' as momentum heads to downside

Canadian stocks, running out of legs to stand on, are now lurching toward a bear market.

Losses among equities in the Standard & Poor’s/TSX Composite Index, already hampered by a rout in commodities, have accelerated in September as health-care stocks joined the fray, led by a 30 percent plunge in Laval, Quebec-based Valeant Pharmaceuticals International Inc.

S&P/TSX Index down 16% from April peak

The S&P/TSX, the worst-performing market in the Group of Seven industrialized nations this year, has plummeted 16 percent from the most recent April peak as of Sept. 29, approaching the commonly accepted definition of a bear-market decline of 20 percent. The index has slumped 5.9 percent in September, touching a two-year low as it careens toward the worst quarterly result in four years.

“Nobody wants to fight the tape, so momentum is all to the downside,” said Greg Taylor, a Toronto-based fund manager at Aurion Capital Management Inc. which has about C$7.2 billion ($5.4 billion) under management. “The scary thing now is the hiding places have been hit. Valeant, other health-care names coming down, these were the ones everyone was on.”

The S&P/TSX jumped 2.1 percent Wednesday, joining a rally in global markets as the third quarter drew to a close. Valeant gained 12 percent after four days of losses.

Canada’s resource-focused stock market has been wrestling all year with a rout in commodities as prices for assets from oil to copper slump amid slowing growth in China and supply gluts. Health-care stocks, led by Valeant, which was briefly the country’s most valuable stock in July, have slumped as the U.S. government scrutinizes their pricing practices.

Dividend Cuts

“The big theme everyone was on earlier in the year was U.S. dollar revenues and getting exposure to that through health-care, technology, consumer stocks,” Taylor said. “It feels like Canada has more risk to it. The commodity complex is finding no bottom right now which is scary for Canada.”

The S&P/TSX Health Care Index rose as much as 94 percent in 2015, peaking at the beginning of August before it began a reversal. It has since plunged 38 percent to wipe out more than three-quarters of its gains for the year. Natural resources stocks remain the worst-performing industries in the S&P/TSX this year, with mining companies and energy producers slumping at least 24 percent.

Oil is more than 25 percent below this year’s high in June, slumping to 2009 lows in August. The nation’s largest crude producers including Crescent Point Energy Corp. have slashed dividends, cut capital spending and laid off workers to boost shrinking cash flow.

Drug Pricing

“We haven’t seen sentiment this negative for the TSX since the financial crisis,” said Shailesh Kshatriya, director of Canadian strategies at Russell Investments in Toronto. His firm manages C$344 billion globally.

Valeant, which reached a reached a record C$346.32 in Toronto on Aug. 5, and smaller drugmaker Concordia Healthcare Corp., were the top two best-performing stocks in the broader S&P/TSX as late as Sept. 18. The drugmakers competed with global peers in an acquisition frenzy in the first half of the year, pursuing a growth-by-acquisition strategy.

A tweet from Democratic presidential candidate Hillary Clinton on Sept. 21 raised concern about possible “price gouging” for prescription drugs and precipitated a selloff. The pressure mounted after U.S. House Democrats on Sept. 28 subpoenaed documents related to increases in Valeant drug prices, sending the company’s shares tumbling 30 percent for the month, the most since 2003. Concordia has plummeted 52 percent in the same period.

Buying Opportunity

Sadiq Adatia, chief investment officer at Sun Life Global Investments Inc., who has been bearish on the Canadian stock market for several years, sees opportunities for investors with a longer time horizon as prices have come down, especially in energy stocks.

“The danger’s not gone but there are opportunities to buy,” Adatia said. His firm manages C$11.2 billion and has pushed cash positions to as much as 15 percent in some portfolios. “Energy stocks have been beaten up a little too much. I think if you’re looking a few years out it’s a very good play.”

While Valeant is one of the largest companies in the S&P/TSX and dominates the health-care industry, the group accounts for only 4.7 percent of the broader gauge. Energy stocks make up about 19 percent of the index by contrast.

Bruce Campbell, a fund manager at StoneCastle Investment Management in Kelowna, British Columbia, is not yet convinced equities are cheap enough to dive in.

“We’re not at the point where we’re pushing that in and saying this is the bottom,” said Campbell, who helps manage about C$100 million and is sitting on cash positions of 30 to 40 percent in his portfolios. “Is this the start of something really bad from a correction standpoint as sectors that were holding us up are dropping? We will know in the next few days.”

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