Canada Economic Transformation Under Way, Bourse Makeover Shows

  • Non-Resource companies jump the most since 1990s tech boom
  • Evolution happening `but there’s a long way' Levine says

Canada’s agonizing transition from its battered resource-based economy toward more diverse sources of growth appears to be gathering pace -- at least in the stock market.

The biggest percentage of non-resource companies made it into the country’s benchmark stock-market gauge in 2015 than in any year since at least the technology boom in 1998. Of the 14 new members added to the Standard & Poor’s/TSX Composite Index in 2015, 86 percent of them were non-resource companies -- including top-performing stocks such as auto-parts supplier Uni-Select Inc., software company Enghouse Systems Ltd. and drugmaker Concordia Healthcare Corp.

The S&P/TSX also deleted 17 resource companies last year, or 77 percent of all eliminations, the most since 2012, according to data compiled by Bloomberg from bourse operator TMX Group Ltd. Companies are added or deleted to the composite index based on market capitalization, volume and liquidity. Each quarter S&P Dow Jones Indices refreshes the index based on new share counts and sorts it by float and market cap, dropping companies that stray beyond the core and adding those that climb.

“We have to get more of this,” said Norman Levine, a fund manager and strategist at Portfolio Management Corp. in Toronto. His firm manages C$526 million ($362 million) “There’s an evolution that will happen but there’s a long way to go.”

New Drivers

Canada is groping for new growth drivers as the commodity-price collapse hammers the resource-heavy economy, leading to thousands of job and investment cuts in energy and mining. The transformation has been stymied by the manufacturing sector’s seeming inability to pick up the slack amid competition from locales such as Mexico and China. About 10,000 exporting companies have closed their doors in Canada over the last decade, according to an estimate in a report last week by Credit Suisse Group AG.

Business creation in the wider economy has slowed. The number of non-resource businesses grew 0.6 percent in the third quarter of 2015 from a year earlier, the lowest year-over-year increase in the quarterly data since the third quarter of 2013, according to preliminary data from Statistics Canada. Resource companies plunged 5.4 percent in the third quarter of 2015 from a year earlier, the biggest decline since at least 2000.

The government needs to invest in business growth and innovation to foster more varied growth, Som Seif, chief executive officer at Purpose Investments Inc. in Toronto, said.

Narrow Breadth

“Canada is a small economy, we don’t have the depth of companies,” Seif said. His firm manages about C$1.8 billion. He added Canada needs more broad, publicly traded firms. “So we need companies like Couche-Tard or Rogers to grow their business. It can’t be a solo situation like Valeant.”

The country’s narrow stock market, where financials, raw materials and energy make up about 66 percent of the S&P/TSX, is often swayed by companies that soar high and fall hard, such as Nortel Networks Ltd. and BlackBerry Ltd. Valeant Pharmaceuticals International Inc. briefly eclipsed Royal Bank of Canada last year to become the country’s largest company before stumbling amid questions over its drug pricing.

Large exposure to commodities has also meant investors in Canadian stocks have had a horrible start to the year. The index has plunged 8.2 percent this year, joining a global equity rout as oil tumbles on concern a slowing Chinese economy will crimp global demand. Investors who scooped up stocks such as Uni-Select and Enghouse have been well rewarded, with those companies gaining 112 percent and 50 percent respectively over the past 12 months.

Play Dead

Canada’s economy has had a long track record of disappointing productivity growth and innovation, especially compared with the U.S., Myles Zyblock, chief investment strategist at Bank of Nova Scotia’s Dynamic Funds unit, said in an interview last week at Bloomberg’s Toronto offices. His group manages about C$110 billion. While Canada is hampered by inherent disadvantages such as a sparse population and constant competition from the much larger U.S., Canadian businesses shouldn’t be discouraged, he said.

“It doesn’t mean we should lie on the floor and play dead,” he said. “We may be small but we’re still underrepresented in those types of global leadership companies. We’ve had promising companies that for whatever reason fall a little short. We haven’t figured it out yet.”

Before it's here, it's on the Bloomberg Terminal.