Photographer: Aaron McKenzie Fraser/Bloomberg

`Vomitous' Year for Canadian Stocks as Valeant, Crude Lead Rout

  • Nation's resource-rich equity index tumbles 11 percent in 2015
  • Strategists see rebound in 2016 as beaten-down shares rally

Canadian stocks capped the worst annual loss since the 2008 financial crisis, mired in a three-day losing streak, as the resource-rich nation’s benchmark equity index sank amid a global retreat in commodities from crude to gold.

Energy and materials producers plunged more than 22 percent in the year, dragging the Standard & Poor’s/TSX Composite Index to an 11 percent slump, third-worst among developed-nation markets tracked by Bloomberg. Valeant Pharmaceuticals International Inc. erased 60 percent of its value in the final five months of the year. Bombardier Inc. plunged 68 percent as the struggling aircraft manufacturer changed chief executives and accepted a bailout from the Quebec government.

There were precious few places to hide this year for Canadian investors. A combination of slowing growth in China and Europe, a glut in crude supplies and a plunge in the nation’s currency amid rising interest rates in America sent energy and raw-materials producers tumbling. The two industries account for about 28 percent of the benchmark gauge. The rout in commodities damped profits at industrial companies that supply the industries, while financial services firms faltered amid poor equity returns.

“The perfect word to describe Canada this year was vomitous,” said Barry Schwartz, chief investment officer at Baskin Wealth Management in Toronto, in a Dec. 29 interview. His firm manages about C$840 million ($605 million). “Investors threw up and threw out everything to do with Canada. It was toxic. A yearlong virus that nobody wanted to be attached to. Join the club if you had a negative year because pretty much everybody did in Canada.”

The S&P/TSX fell 1 percent to 13,009.95 at 4 p.m. in Toronto, capping its first annual decline since 2011. Along the way, the benchmark dipped below 13,000 to trade at its lowest level in two years. The index also suffered through an eight-day selloff that was the longest since June 2002. Its return was better than only Singapore and Greece among developed markets.

Of the 240 members in the index only about a third posted gains for the year. Top-performing stocks included recent entrants Kinaxis Inc. and Uni-Select Inc., which were added to the index as late as December.

The breadth of the decline and a drop in equity valuations have Canadian equity strategists predicting a rebound for the gauge in 2016. The price-to-earnings ratio for stocks in the S&P/TSX has declined 11 percent to about 20.1 from a 2015 high of 22.7 in April, according to data compiled by Bloomberg.

“Canada is down, but not out,” said Brian Belski, chief investment strategist at BMO Capital Markets. He forecasts the index to reach 15,300 next year, implying a gain of about 18 percent from current levels. “In 2016 Canada will surprise by outperforming the U.S. for the first time in six years,” Belski said in a note to clients on Dec. 15.

Vincent Delisle, portfolio strategist at Scotia Capital, predicts a more modest rally for the S&P/TSX, to 14,200, as resource and cyclical stocks in Canada and emerging markets recover at the same time U.S. equities underperform.

Many top performers this year benefited from the U.S. market as the Canadian dollar weakened. Consumer stocks such as beverage maker Cott Corp. and gas-station-chain operator Alimentation Couche-Tard Inc. were among the few bright spots, with gains of more than 25 percent. Technology companies Constellation Software Inc. and Descartes Systems Group Inc. added at least 61 percent.

“What worked in 2014 and 2015 -- consumer, technology, health-care -- could lag” if the dollar declines, Delisle said in a report. “A U.S. dollar shift would represent an important catalyst to execute on our transition game plan.”

Stefane Marion, chief economist and strategist at National Bank Financial Inc., estimates the index will climb to 15,000 by the end of 2016 as earnings growth in non-resource sectors and job creation in central Canada and British Columbia help offset weakness in the oil patch.

No Refuge

Many investors seeking refuge from the rout in commodities in 2015 flocked to drugmaker Valeant, boosting the stock to a record in August that briefly gave it the largest market capitalization in Canada. The strategy backfired, as the stock tumbled through the end of the year amid scrutiny over the Laval, Quebec-based company’s pricing practices, use of mail-order pharmacies and acquisitions for growth.

Bombardier, one of the worst-performing stocks in the S&P/TSX this year, plunged to 1991 lows as the Montreal-based planemaker struggled with the oft-delayed, over-budget CSeries jetliner, forcing a $1.3 billion rescue from the Quebec government in October. Bombardier reported a $4.9 billion third-quarter loss that day, among the worst posted by a Canadian company since 2007, according to data compiled by Bloomberg.

“There were maybe three stocks that worked, and one that only worked for about half a year,” Baskin Wealth’s Schwartz said. It’s best for investors to put 2015 behind them and move on, he said. “It’s only a year, don’t get too nervous or too upset.”

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