Photographer: Brent Lewin/Bloomberg

Consumer Stocks May Lose Their Crown as Canadians Tighten Belts

  • Consumer discretionary index includes auto, telecom stocks
  • Quebecor, Cogeco, Linamar, Martinrea among top performers

Consumer stocks have been the biggest winners on Canada’s struggling stock market this year thanks to an incongruous mix of companies, but the sector’s outperformance looks set to wane along with the housing market.

The consumer discretionary index may be one of the oddest collections of stocks on the S&P/TSX Composite Index, which is divided into 11 sectors. It includes retailers that fit neatly into the category like Canadian Tire Corp. Ltd. and Hudson’s Bay Co., but also auto-parts stocks like Magna International Inc. that might belong better with their industrial peers and cable companies like Quebecor Inc. that would seem more at home in the telecom index.

"The mix isn’t necessarily intuitive," said Craig Fehr, Canadian investment strategist at Edward Jones & Co. "I think the breadth within that sector as it’s represented in the TSX is wider than might be assumed at first blush."

That diversity has been the sector’s strength this year. It rose 8.5 percent in the year through Tuesday, outpacing all other sectors on the S&P/TSX, which was down 1.3 percent. Two of the sector’s 10 best-performing stocks, Cogeco Communications Inc. and Quebecor, are telecom companies and two others make auto parts: Martinrea International Inc. and Linamar Corp.

The sector’s received a boost from low interest rates, a weak loonie, a strong housing market and significant job gains, all of which have stimulated retail sales and consumer confidence, said Cavan Yie, portfolio manager at Manulife Asset Management Ltd., who owns shares in Restaurant Brands International Inc., Dollarama Inc. and Gildan Activewear Inc. among the C$6 billion ($4.8 billion) he manages.

New players Freshii Inc., Aritzia Inc. and Canada Goose Holdings Inc. have also sparked interest following high-profile initial public offerings, though they haven’t yet been added to the index.

Good Run

"There’s been a sector rotation into the consumer space," said Ungad Chadda, president of capital formation for equity capital markets at TMX Group Ltd., which owns the Toronto Stock Exchange. "Consumers have been feeling more confident on both sides of the border, so I’m actually not surprised that we’ve seen Freshii oversubscribed, Canada Goose oversubscribed, Aritzia oversubscribed."

But pure consumer plays may prove to be a heavier drag as the factors that have been prompting Canadians to spend ebb in the final months of the year. The Bank of Canada hiked rates in July for the first time since 2010, the dollar has gained about 9 percent since May and home sales are beginning to moderate in Toronto.

"We’ve had a good run," Yie said. "We think there’s a little more to go but I think we’re nearing the tail end of it."

A correcting housing market and a reversal in the wealth effect will have an impact on housing-related purchases, said David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff & Associates Inc. The firm managed C$8.9 billion at June 30.

“It’s going to be a lot more challenging for the sector," Rosenberg said in an interview at Bloomberg’s Toronto office. ”I think that if you were fortunate enough to be in the TSX consumer space this year, my recommendation would be to take profits and deploy them elsewhere."

As for how Magna and other auto-parts suppliers ended up in the consumer discretionary sector, it’s all down to the Global Industry Classification Standard which S&P Dow Jones Indices and MSCI Inc. use to categorize stocks. Magna is classified in the auto parts and equipment sub-industry, which is part of the auto components industry, which belongs in the automobiles and components industry group, which is part of the consumer discretionary sector because cars are considered a discretionary item.

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