The Canadian stock market has struggled over the past three years, with the S&PTSX index at present roughly where it was in early July 2014. The TSX index high for 2014 is around 4% higher than the current index value (excluding dividend payments). The root cause for the weak performance initially has been the collapse of commodity prices, especially oil prices dropping from a high of around $100 US/barrel a few years ago to a low of around $26 US/barrel in early 2016, and currently trading around $45 US/barrel.
As much as Canadian governments have talked about diversifying the economy, Canada is still classified as a commodity based economy. Historically, the C$ (Canadian dollar) trades in sympathy to the price of crude oil reaching above PAR to the US$ when oil was over $100 /barrel and under $.70 (70 cents) to the US$ when oil was under $30/barrel.
Currently this relationship is not working, crude is well under $50/barrel but the C$ is well above $.77 C$ to the US$ and could go as high as $.78 to $.80. There are three main reasons for the C$ strength they are as follows:
- Bank of Canada has gone on record recently saying it sees the need to consider higher interest rates, especially restoring the two emergency interest rate cuts it did in 2015 as oil prices fell. The first quarter-point hike occurred on Wednesday July 12, 2017. Rising interest rates hurt bond values which lowers your bond investment returns in the short term.
- Based on seasonal charts the C$ is the strongest right now and lasts until the first few weeks of July. By the end of July seasonal charts show the C$ slowly declining until year end.
- In June the most lopsided trade on the futures market was short the C$ (investors betting the C$ would keep declining). Once the C$ started to rally these investors were caught and many had to buy the C$ to square off their contracts. This has caused a sharp rise in the C$ up over 7% in just over a month which is very abnormal. A rising C$ hurts Canadian exporters and Canadian investors who hold foreign investments in a C$ investment account.
In summary what this means is the Canadian S&PTSX stock index (equities) has been weak because of poor commodity prices. Foreign equity holdings have been trading better than Canadian equities but the strong C$ has more than offset the gains providing more return weakness.
Usually both main asset groups (fixed income & equities) do not move together but recently they have both shown weakness. The good news is I don’t expect the above investment conditions to continue. As we head to year end I see commodity prices starting to show some strength as good global economic growth continues. Rising interest rates appear to have been already priced into the bond market, I expect to see bond returns to normalize soon.
As previously mentioned we will soon enter the seasonal period of the year where the C$ usually shows weakness until year end. Based on these factors I expect Canadian & foreign equities to strengthen while bonds should provide coupon like returns for the next 6 to 12 months.
As always, if you have any questions or comments please contact me at 780-=944-2690 or b.achtymichuk@holliswealth.com.
Best Regards
Bill Achtymichuk, CIM, FSCI, CFP®
Portfolio Manager
Investment Advisor, Director, Private Client Group
P.S. For Managed accounts over the past few months as the Canadian market started to weaken we reduced the number of Canadian equity investments to one stock and several mutual fund/ETF holdings. This should further reduce volatility in portfolio’s and provide even more diversification. The perfect storm of rising interest, weak commodity prices and a strong C$ have caused weak performance which I expect should soon pass. We are mostly invested with a conservative bias and returns should improve with stronger stock markets, stable bond prices and a sideways to lower C$.