Year of 'serial disappointments' leaves Canada investors reeling - Poloz

Year of 'serial disappointments' leaves Canada investors reeling - Poloz

Year of by Erik Hertzberg and Allison McNeely

Bank of Canada Governor Stephen Poloz summed up the Canadian economy best by calling it “another year in the serial-disappointment series.”

For investors in Canadian assets the disappointments ran the gamut from stocks to bonds to the currency as the collapse in commodity prices sapped growth in the world’s 11th-largest economy. So let’s catalog the pain, say good riddance to Canada’s horrible year and contemplate sunnier days ahead:

1. Among Developed World’s Worst Stock Markets

The Standard & Poor’s/TSX Composite Index has plunged 11 percent since the beginning of the year for the worst showing among its Group of 10 peers as crude oil’s 35 percent tumble weighed on stocks. Of the world’s 24 developed markets, only the exchanges of Greece and Singapore have performed worse.

"There’s really been no place to hide in the Canadian equities side," said Bruce Cooper, chief investment officer at the asset management arm of Toronto-Dominion Bank, which has about $260 billion under management. Resources have been "atrocious," banks have lost money and everything else has been a mixed bag, he said. Next year is going to be challenging too because the same fundamental headwinds are in place. "We live in a low- growth world."

2. Spectacular Swoons

The carnage in the S&P/TSX has been wide and deep with about 65 percent of 240 stocks in the equity gauge ending the year in the red. Also evident were the flame outs of some of the country’s most high-profile stocks. Valeant Pharmaceuticals Inc., which had doubled earlier in the year to briefly eclipse Royal Bank of Canada as the most valuable company in Canada, tumbled 56 percent from its peak amid scrutiny over its pricing practices. Bombardier Inc. slid 67 percent as the struggling planemaker had to seek a cash infusion from the Quebec government as well as raising debt and equity to keep its jetliner programs on track. Baytex Energy Corp. was hit by a perfect storm of sliding oil prices and high debt. Its 81 percent drop this year made it the worst-performing stock in the index.

"The Canadian market did not have a good year at all. It’s been the kicking bag globally," said Greg Taylor, a Toronto- based fund manager at Aurion Capital Management Inc. which has about C$7.2 billion ($5.2 billion) under management. "Everyone’s been trying to get off of it for fear of commodities, for fear of the slowdown in western Canada, for fear of a potential housing crisis."

Bearishness on Canada has created a buying opportunity for 2016 because there are so few active managers in the market right now, he said. The U.S. dollar will peak after last week’s Federal Reserve interest rate hike, giving investors a bounce in gold and oil and creating a short-term buying opportunity in commodities, Taylor said.

3. Junkiest of the Junk

Canada’s status as one of the costliest places to drill and mine for oil also made the country’s high-yield bonds the least desirable among its industrialized peers this year. Junk bonds lost nearly 12 percent as of Dec. 18, the worst-performing among G-10 countries, according to Bank of America Merrill Lynch data.

"Towards the end of the year, because a lot of high-yield managers have taken their bruises in certain pockets, there’s a general aversion to risk," said Nicholas Leach, high- yield portfolio manager at CIBC Asset Management, who helps manage C$2 billion. "I don’t think any managers wanted to really take on additional risk given that their risk buckets might have been totally consumed by energy and basic materials throughout the year."

Bond investors should see above-coupon returns in consumer- driven sectors in 2016 because the lower commodity prices will leave consumers with more money in their pockets, he said.

"It’s the best opportunity since 2011 in terms of yield and credit spreads," Leach said.

4. Loonie Plummet Worst of G10

The Canadian dollar has slumped alongside the price of oil this year, reaching an 11-year low as crude dipped below $35 a barrel in December. The weak oil price and the Federal Reserve’s plans for further hikes to the key U.S. interest rate in 2016 mean that the loonie still has further to fall, said Emanuella Enenajor, senior economist at Bank of America Merrill Lynch, by phone from New York.

She sees the dollar at $1.45 in the first quarter of 2016, from about $1.40 now, she said.

5. We’ll Always Have Housing -- Except in Calgary

The torrid pace of housing price increases continued -- at least in Toronto and Vancouver. In EasternCanada prices were flat, while in Alberta they plummeted, once again on oil. This "trifurcation" of the housing market, as the Bank of Canada termed it, prompted the government and regulators to cool markets in the hottest regions, including the doubling of down- payments to 10 percent on homes above C$500,000.

House prices jumped 10 percent in Toronto and 18 percent in Vancouver while they slumped 2 percent in Calgary, compared with a 7 percent national average gain, according to the Canadian Real Estate Association.

"You don’t want housing to be the bright spot particularly if you want manufacturing exports to lead growth, but given our low rate environment, housing has been one of the key bright spots of the economy," said Enenajor. She expects that to remain a fundamental support for Canada next year as monetary policy remains stimulative.


--With assistance from Katia Dmitrieva.

(Bloomberg)