Canada Investor Nerves Wear Thin With Loonie, Stock Plunge

  • Barrage of bad news as loonie and stocks plummet with oil
  • Bets on Bank of Canada rate cut pile up as bond yields tumble

A record losing streak in the loonie, plunging bond yields and about $150 billion wiped out in the stock market have left Canadian investors hanging by a thread. Panic is starting to set in.

“The word fear is finally starting to come up," Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel in Calgary, said by phone. "Clients and people are starting to panic. It’s sinking in, but no one knows what to do.”

The country’s benchmark Standard & Poor’s/TSX Composite Index fell 2.1 percent to 12,073.46 at 4 p.m. in Toronto, undoing Thursday’s rally and resuming a sell-off that’s pulled Canada into a bear market. Stocks plunged 7.2 percent this year and are down about 23 percent from a September 2014 record. The Canadian dollar slumped to a new 13-year low and yields on five-year government bonds fell to a record low of 0.511 percent on Wednesday as speculation builds the Bank of Canada will cut interest rates next week.

Canada’s economy, heavily weighed toward resource industries such as oil and mining, has been rocked by concerns about the slowdown in China that has pushed the price of West Texas Intermediate crude below $30 for the first time since 2003. Prices for Canada’s heavy crude, which trades at a discount to the U.S. benchmark, have sunk to around $15 a barrel.

Rate Cut

“We probably haven’t yet seen the impact of the lower oil price transmitted to the rest of the economy yet," said Daniel Solomon, chief investment officer at NEI Investments in Toronto, which oversees about C$6 billion ($4.1 billion) in assets. "We have skipped a recession for now, but maybe one will come.”

Investors “can probably expect a rate cut,” Solomon said.

The Canadian dollar fell for an 11th-straight day Friday, continuing its worst streak ever. That’s fueled speculation the Bank of Canada will cut its benchmark interest rate to its 2009 financial crisis level. One U.S. dollar bought 1.4529 Canadian cents at 4 p.m.

The sell-off mirrored a global decline in equities as the Dow Jones Industrial Average dropped 2.4 percent, European equities slipped into a bear market and Chinese stocks wiped out gains to add to the worst start to a year on record.

The combination of oil and the Canadian dollar is making the pain especially acute for Canadians, analysts from Houston-based Tudor Pickering Holt & Co. said in a Jan. 12 note to clients.

“We think the U.S. is bad, but Canada is even worse,” the analysts wrote. “The longer this downturn lasts at these levels, the more likely it is that balance sheets continue to get stretched, pushing a Canadian growth story to the far right.”

Stress Rising

Energy companies led stock declines on Friday, falling 3.5 percent. Financial services weren’t far behind, dropping 2.6 percent. Royal Bank of Canada, the country’s second-biggest bank by assets, plunged 3.6 percent to C$67.05, its biggest drop in more than five years.

“Oil is flowing through the pipeline to other sectors and it’s causing fear and panic. People are hitting the sell button in the other areas,” Pelletier said. “If you’re out east, you’re not isolated. This is going to impact you.”

Daniel Lloyd, founder and portfolio manager at Sui Generis Investment Partners in Toronto, said he sees another 10 percent decline for Canada’s stock market this year.

“This isn’t dissimilar from the tail end of the bull market that ended in 2007,” Lloyd said. “The flashpoint of the 2015 iteration is obviously the collapse in energy markets and the broader commodity complex, where you have hundreds of billions of dollars of debt issued by companies who are cash flow negative.”

Anxiety levels are rising in Alberta, home to the world’s third-largest oil reserves -- and one the most expensive places in the world to produce. More than 40,000 jobs in the energy industry have been cut nationwide and billions of dollars in investments have been scaled back.

"People in the oil patch, either on the financial side or operating side, you spend everything that you think you are going to make, I find, so there is a lot of stress," Jennifer Stevenson, energy portfolio manager at 1832 Asset Management LP, said in an interview in Toronto’s Bloomberg office this week.

Stevenson said friends of her husband are boat dealers. People laid off in the oil patch in the summer were spending their severance checks on boats because they thought the oil price would come back.

"Now, they are not selling any boats, partly because the U.S. dollar is up and they are all made in states, but guys have no dough," she said.

Amid all the stock-market carnage, investors are toying with trying to time a bottom, said Rafi Tahmazian, a fund manager at Canoe Financial LP, who returned from four days of packed meetings with clients in Toronto on Thursday, he said.

“There’s an insane appetite to put on energy weightings,” Tahmazian said. Rather than betting on the cycle, Tahmazian is buying energy stocks showing good value that he thinks will do well in a recovery, including on down days like Friday, he said.

“I tell them the same thing over and over, you’re either going to get lucky or you’re going to be wrong,” Tahmazian said.

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