Mining Capital Can't Win as Canada Stocks Lag Metal Gains

Updated on
  • Materials stocks have shrunk in importance to S&P/TSX
  • ‘Multi-quarter’ rally needed for shares to match commodities

Industrial metals have posted their longest run of weekly gains since 2006 and gold’s had its best month since January, but the commodity-heavy equity benchmark in the world’s mining capital just can’t seem to gain any traction.

It’s the latest frustration for Canada’s S&P/TSX Composite Index, which has lagged all but one of its developed-market peers this year even as base metals have rallied on stronger Chinese demand and gold has gained amid geopolitical uncertainties.

Chalk it up to the previous base-metal slump from 2011 to early 2016 which has shrunk the industry and scarred investors. The materials sector, dominated by miners such as Barrick Gold Corp. and Teck Resources Ltd., is about half as important as it was to Canada’s equity benchmark six years ago.

“It’s less impactful when we get a bit of a snap-back, in particular on the base-metals side,” Paul Taylor, chief investment officer for asset allocation at BMO Asset Management, said in a phone interview.

In addition to a smaller sector, investors are also wary. Materials stocks haven’t kept pace with the gains in either gold or industrial-metal prices since the beginning of August, when prices really began to take off.

“The age-old debate in the Canadian equity market is to what extent does the market need to see a sustained uptrend in commodity prices before it will start to be reflected in the price of the underlying stocks?” said Taylor, whose firm manages C$55 billion ($44 billion). “That’s part of what we’re seeing in terms of the sloppy trading of the Canadian equity market -- we need to see something that’s more sustained.”

Kept Afloat

Taylor said metals would have to experience a "multi-quarter" rally before stocks start to match the gains.

Still, the S&P/TSX would be worse off if it wasn’t for the materials sector, Craig Fehr, Canadian investment strategist at Edward Jones & Co., said. The TMX Group Inc., which runs the Toronto Stock Exchange and TSX Venture Exchange, was home to 57 percent of global mining financings in 2016 and had 1,224 issuers as of July.

“The gains we’ve seen from the materials index are going a long way to keeping the TSX near the flat line on the year,” Fehr said by phone. The materials sector is up 4.8 percent year-to-date compared with a decline of 16 percent for the energy index, which has been the biggest drag on the benchmark.

Materials shares should continue to gain for the remainder of the year, said David Rosenberg, chief economist and strategist at Toronto-based wealth management firm Gluskin Sheff & Associates Inc. The firm managed C$8.9 billion as of June 30.

Cheap Equities

Rosenberg recommends investors buy into what he calls the “double-B barbell: banks and base metals.”

Taylor, meanwhile, is “modestly overweight” Canadian equities in his portfolios, but not because he expects materials stocks to outperform.

“Canadian equities are cheap. At some point in time, one of two things will happen: either the earnings improvement in Canada is an illusion and that’ll roll over, or Canadian equities will play catchup,” Taylor said. “My guess is that we play catchup.”

Taylor recommends Canadian investors go overweight financials, consumer discretionary and technology stocks, with a slight underweight to materials.

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