The Standard & Poor’s/TSX Composite Index fell 12 percent (SPTSX)in 2011 through yesterday, while the S&P 500 rose 0.4 percent, the first year Canada has lagged behind the U.S. since 2003 and the widest gap since crude oil slid below $11 a barrel 13 years ago. Energy and mining stocks, almost half of Canada’s market by value, fell as Suncor Energy Inc. (SU), the country’s largest oil and gas producer, lost 24 percent and Teck Resources Ltd., its biggest base-metals company, plunged 43 percent.
Canada’s oil, gas and metal shares slumped after valuations soared in 2009-2010, as oil prices doubled and copper tripled after the world pulled out of a recession, spurring a 50 percent surge in the S&P/TSX. This year, the level of the S&P/TSX Energy Index relative to profits fell as much as 43 percent, after hitting the highest multiple since at least 2002 in March.
“That was an accident waiting to happen,” James Cole, a money manager whose Manulife Canadian Focus Fund has beaten 97 percent of other funds in its category this year, said in a telephone interview. “Commodity stocks, which are very heavy in the S&P/TSX, were being traded at very high multiples to earnings, derived from very high commodity prices.”
The Euribor-OIS spread, a measure of euro-region banks’ reluctance to lend to one another, increased sixfold from June 14 to Dec. 1 as the debt crisis spread. Growth of industrial production in China, the biggest user of base metals and second- largest oil consumer, fell to the lowest rate since August 2009 last month. The Thomson Reuters/Jefferies CRB commodity index plunged 18 percent from its post-2008 high on April 29 to yesterday.
Highest Since 2004
The valuation of Canadian Natural Resources Ltd., the country’s second-biggest oil and gas producer, has fallen by almost half since March, when the shares traded for 49 times earnings, the highest multiple since 1999. Teck Resources was at 36 times earnings in January, the highest since 2004. It now trades at 9.4 times earnings.
Energy and raw-materials companies make up 47 percent of Canadian stocks (SPTSX) by market value, according to data compiled by Bloomberg. In the U.S., those industries make up 16 percent of equities by market value, while health care, consumer staples and utilities, considered to be less-tied to economic growth, account for 24 percent.
Global Declines
The S&P 500 of U.S. stocks is the only benchmark index for the 24 developed markets that advanced this year, while the Canadian measure has the sixth-smallest retreat. The MSCI World Index fell 7.9 percent through yesterday, and the Stoxx Europe 600 Index (SXXP)decreased 12 percent as concern over potential sovereign-debt defaults drove its banks down 33 percent.
Toronto-Dominion Bank cut its 2012 global economic-growth forecast to 2.5 percent on Dec. 14 from 3.2 percent in September. A failure to contain Europe’s crisis “could very well unleash a financial chain reaction that would rapidly spread globally,” the lender said in a note to clients. Citigroup Inc. and UBS AG cut their world gross domestic product forecasts last month.
Shares of Canadian commodity producers have lost more this year than the commodities themselves. Short-term oil futures gained 9.1 percent through yesterday as political unrest in theMiddle East and northern Africa helped sustain prices. Crude futures for 2015 and beyond have declined, like energy stocks.
Recession Concerns
“Commodity stocks are reflecting longer expectations that we’ll see lower commodity prices,” Kate Warne, the investment strategist for Canada and the U.S. at Edward Jones & Co. in Des Peres, Missouri, said in an interview in Toronto. “With concerns about the recession in Europe and the slowdown in China, we’ve seen the impact hit both energy stocks as well as commodity prices, and therefore materials stocks, pretty hard.”
The S&P 500 advanced, even as the 23 other developed-market national stock indexes fell, due mostly to gains in utilities, consumer-staples and health-care stocks. Those so-called defensive industries take up three times as much of the stock market by value in the U.S. as they do in Canada, according to data compiled by Bloomberg.
“In the U.S., the kind of stocks that have done well have been classic defensive areas,” Bruce Cooper, head of equities at TD Asset Management, said in a telephone interview. The unit of Toronto-Dominion Bank oversees about C$190 billion ($186 billion). “The most important driver is that differentiation between the more-defensive stocks in the U.S. and those more- cyclical stocks in Canada.”
Trailing Peers
Even within some industries, Canadian equities have trailed their U.S. counterparts. The S&P 500 Energy Index (S5ENRS) increased 2.9 percent this year through yesterday, while its Canadian equivalent declined 13 percent. Fortis Inc., Canada’s largest publicly traded electricity producer, fell 3 percent, while Southern Co. (SO), the biggest U.S. utility by market value, gained 22 percent.
The S&P/TSX has also been held back by losses in shares of BlackBerry maker Research In Motion Ltd. (RIM) and Manulife Financial Inc., North America’s fourth-largest insurer. RIM sank 75 percent this year through yesterday as it lost market share to Apple Inc. and devices using Google Inc.’s Android operating system. Manulife tumbled 38 percent as falling equities and historically low bond yields reduced investment income.
U.S. outperformance may reflect a shift toward larger stocks as investors shy away from risk, Cooper said. Companies in the S&P 500 have an average market value of $24 billion, almost four times as much as the S&P/TSX.
Premium Eliminated
The S&P/TSX’s slide has wiped out (SPTSX) its valuation premium over the S&P 500. Both indexes now trade at 11.8 times analysts’ earnings forecasts for the next 12 months after Canadian stocks had been more expensive for two years.
Stephen Lingard, a Toronto-based money manager at Franklin Resources Inc.’s Franklin Templeton Multi-Asset Strategies, said he is likely to sell U.S. stocks if European leaders craft a plan that reduces the risk to equities from the debt crisis.
“The U.S. has served its purpose in a defensive market,” said Lingard, whose unit oversees about $25 billion. “We’re not horrified by what’s going on.”
To contact the reporter on this story: Matt Walcoff in Toronto at mwalcoff1@bloomberg.net
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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