Coming out of the abyss

After a nightmare few years, Canadian securities had a solid start to 2016, but is the recovery part of a longer-term trend?

“The markets can make you feel like a genius; then when they turn, they can make you very humble.” John McCoach, president of the TSX Venture Exchange, realizes that sentiment better than most. The index has had a rough time of it in recent years; in fact, as of the beginning of 2016, it had lost more than 70% of its value over the preceding five years. Last year was particularly gruesome for the resource-heavy index as oil took its big plunge, but this year has proven much healthier for the TSXV, and indeed the TMX Group as a whole.

After reaching a nadir in January, when trading across all the TMX indices slumped by 20% year-over-year, both the TSXV and its senior partner, the S&P/TSX, have rebounded strongly, matching the upswing of both oil and the loonie. 

For McCoach, who announced in April his intention to step down from his position later this year, the reversal is a sign that Canada’s main exchanges are headed in the right direction going forward.

“My crystal ball isn’t any better than anyone else’s, but I am confident that our market has turned,” he says. “I’m looking forward to continued growth in the Venture market in 2016. That’s why I feel very comfortable stepping back at this time. I didn’t want to leave here without knowing I had done everything I could to help the market.”

For Paul Green, portfolio manager with Holliswealth’s Green Private Wealth Counsel, a more Canada-centric investment strategy has definitely emerged over the spring. 

“Canadian equities are definitely more attractive than at the start of the year,” he says. “We were completely out of the market until the end of March, but since then we have gone for Canadian stocks coupled with a diversified basket of US ETFs and some Canadian ETFs.”

That’s not to say he advises jumping headfirst into Canadian securities. Given the volatility of both the S&P/TSX and the TSXV over the past year and a half, some caution is still advised.

“We still like US equities more than Canadian, but only slightly,” Green says. “Canadian equities should do better than bonds and cash over the next six to 18 months.”

The inclination among the investment community toward the US has been a constant over the past five years, but signs point to a changing tide. 

In May, RBC’s head of Canadian equity strategy, Matthew Barasch, stated that inferior Canadian equity returns had likely come to an end, predicting that the S&P/TSX would likely outperform the S&P 500 and other global equity benchmarks until 2017. 

The precipitous decline in commodity prices, which began in mid-2014 when the price of crude fell to 13-year lows, meant the Canadian exchanges realized they needed to adapt or die. The TMX duly kickstarted a program late last year called ‘Revitalizing the TSX Venture.’ In achieving that goal, it hoped to reduce costs, expand its investor base and increase liquidity, while also diversifying listings and limiting its overexposure to energy.

The timing was no coincidence – new competitors in the form of Aequitas Innovations’ Neo Exchange and Nasdaq’s acquisition of Chi-X Canada meant the status quo was prime for a shakeup. The results have been impressive: From January 20 through May 10, the S&P/TSX
Venture Composite Index is up 39.6%; from the end of January to the end of April, volume traded on the TSXV is up 130%, while value traded is up 170% and the number of transactions is up 132%. Obviously, this didn’t go unnoticed by TSXV’s outgoing president. 

“I feel what we have done to revitalize the Venture exchange has made a big difference, McCoach says. “Of course, the firming up of metal prices and the stabilization in the price of oil have done more than I could ever possibly do, but I do feel there is more hope in the market, and this turn is part of a longer trend.”

While it’s obvious that the fortunes of the Canadian exchanges are solidly tied to that of oil, moves are being made to lessen that dependence.

“There is a lot of innovation in Canada,” McCoach says. “It is a leader in many sectors. Of course, natural resources, particularly oil, attract a lot of headlines. Right now we are about 70% natural resources, but we would like to see that be about 50%.”