Outlier or Canaries?

Canadian Market at a crossroads

June 5, 2017

International investors put a for big “For Sale” sign on Canadian equities this past month driving down the Toronto stock market. Hardest hit have been our financials, namely our banks as worries of a housing bubble materializing in Vancouver and Toronto has been amplified with the fallout from the Home Capital debacle. But it isn’t just Vancouver and Toronto. The 38 year old Calgary based Walton Group, one of Canada’s largest private real estate firms sought creditor protection in late April.

For more on what is going on and what could happen going forward we direct you to the two following links which are very informative.

In Home Capital’s Mortgage Mess, Blame the ‘Unlucky’ Brokers

The Best Way to Own Canadian Banks

We haven’t had a real estate crash in Canada since 1990 (we avoided the 2008 US bubble) and as Mark Yamada points out in the article above entitled ‘The Best Way to Own Canadian Banks’, it took our bank shares three years to recover from that one. Could Walton and Home Capital simply be outliers or are they the canary in the coal mines?

Adding salt to the wound is the International distaste for Canadian energy stocks and the Canadian energy sector as a whole. With the price of crude seemingly stuck at the $42 to $52 mark it makes it difficult for Canadian energy companies to compete. We have a higher cost of extraction and lack of pipelines to ship our product. Additionally the multinationals are scaling back operations in Canada with no less than 7 major international energy companies pulling billions of dollars out of the country since January 2016. Capital goes where it is appreciated and there are many reasons for these companies to invest elsewhere such as the USA. The impediments are the higher production costs, lack of pipelines and of course the newly minted carbon tax.

With financial services and energy making up 55% of the Canadian equity markets it is easy to see why cash is leaving Canada. As a note our portfolios remain significantly underweight these two sectors with less than a 12% weighting combined and we anticipate to be lowering our Canadian exposure in the weeks ahead.

Banks and oil affect our currency as well and if the health of these two sectors continues to suffer we might see an even deeper dive for the loonie.

Stay tuned to our blogs and our website for further notes and updates.

Cooper Schneider Financial