Valeant Piles on the Misery as Canadian Stocks Eye 2013 Lows

  • Oil to financials drag on developed world's third-worst market
  • `Nothing on the horizon that will paint a brighter picture'

Canada is the orphan equity market nobody wants.

Hammered by the commodity meltdown all year, shares of some of its biggest corporate icons are now also sliding, driving the benchmark Standard & Poor’s/TSX Composite Index toward its lowest level in two years. On Friday, the resource-heavy index capped its longest losing streak in more than a decade, worse than any stretch during the 2008 financial crisis.

“There will be more pain for Canada,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments in Toronto. His firm manages about C$11.5 billion ($8.6 billion), and has been underweight Canadian investments for three years in favor of U.S. and international markets. The S&P/TSX will likely fall below 13,000 points in the near term, levels not seen in two years, he said.

“There will be more downside here," he said. “We’re just starting. There’s nothing on the horizon that will paint a brighter picture for Canada.”

The S&P/TSX, the benchmark equity gauge for the world’s 11th largest economy, has slumped almost 11 percent this year, posting the third-worst decline ahead of only Singapore and Greece among 24 developed markets.

After a brief 1.7 percent rally in October, the S&P/TSX declined for eight days in a row through Friday to 13,075.42, the longest losing streak since June 2002. A break through the 13,004.58 low on Sept. 28 would take it to October 2013 lows. The index rebounded 0.4 percent Monday as commodities producers increased with the price of oil and gold.

Commodities Catalyst

Commodites have been the major catalyst for the decline, with prices from oil to copper sliding amid slowing growth in China and supply gluts. Expectations the U.S. Federal Reserve will raise interest rates as early as December is strengthening the U.S. dollar, which commodities are typically priced in, making them more expensive to buy.

“There is so much apathy and negativity against Canada,” said Greg Taylor, a fund manager at Aurion Capital Management in Toronto. His firm manages about C$7.2 billion. “Nobody wants to put a pin in this, take a stand and fight back. You have uncertainty about the Fed, the U.S. dollar strengthening, commodities getting crushed. Canada, psychologically, has been hurt.”

Drugmakers, a rare source of positive returns for Canadian investors through the first half of the year, have become the worst-performing stocks in the S&P/TSX in a matter of months. Valeant Pharmaceuticals International Inc., briefly the largest company in Canada by market capitalization, has plunged more than 70 percent from an August record and faces continued scrutiny and probes from U.S. lawmakers over its pricing practices.

“Our one non-commodity trade just blew up as fast as anything I’ve ever seen,” Taylor said. “Right now we’re in a period of max uncertainty. No one knows what oil will do or what the Fed will do so people are just staying on the sidelines in Canada.”

Banks Crumbling

Even the country’s vaunted banks, ranked the world’s soundest by the World Economic Forum for the eighth year in a row, have been crumbling, with Royal Bank of Canada and Bank of Nova Scotia posting declines of more than 7.9 percent this year over concerns of a slowdown in consumer lending. Bombardier Inc., once one of the country’s biggest industrials, has asked for government aid for its struggling C Series jet program, with its shares down almost 70 percent this year.

With the slide in equity prices, valuations for S&P/TSX stocks have fallen about 9 percent from an April peak to about 21 times earnings. Nevertheless, it’s difficult for investors to properly value Canadian stocks, especially natural-resource producers, given the uncertainty surrounding the price of commodities, said Ian Nakamoto, director of research at MacDougall MacDougall & MacTier in Toronto. His firm manages about C$5 billion.

Some investors see grounds for optimism in Canada’s prospects longer term.

“We’re more positive on Canadian companies with U.S. exposure,” said Tim Hylton, a Toronto-based equity strategist at Fiera Capital Corp. His firm manages about C$8.8 billion and holds positions in companies including packager CCL Industries Inc. and auto-parts manufacturer Magna International Inc., which are positioned to take advantage of an improving U.S. economy. “We would forecast a 6 to 8 percent increase over the next 12 months for Canadian equities.” 

Subtle Shift

Hylton’s firm owns positions in West Fraser Timber Co., as the outlook for U.S. housing is improving, he said. In the past couple of months Fiera has also “made a first, subtle shift” from integrated energy names such as Suncor Energy Inc. to producers such as Canadian Natural Resources Ltd.

“We’re dipping our toes in the water, we’re doing this with an eye to the future,” Hylton said. “Oil prices will come up as the supply-and-demand balance improves.”

For Aurion’s Taylor, there’s no reward for those getting off the sidelines early. While a case can be made for a rebound in Canada, it would require a series of dominoes to fall perfectly, including sudden economic turnarounds in Europe and China and a sharp jump in oil.

“If you want to be bullish on Canada it would take a lot of assumptions,” he said. “You can’t fight this. There’s no points for being early. We’re in this perfect storm, we’re closer to pricing in the worst-case scenario.”

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