Canada - TSX

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INTRODUCTION

The Toronto Stock Exchange in Q2 of 2022 reported revenue of $261.1 million, up 17% from Q1 2021. Growth was predominantly driven by the acquisition of voting control of BOX Holdings Group and AST Canada. Despite this, the adjusted diluted earnings per share ended at $1.88, down from $1.90 in Q2/21. This has largely been attributed to external factors, including increased volatility, higher interest rates and geopolitical events negatively impacting global capital market activity and having a flow on effect to the TSX and Canadian Economy as whole. Further to this, outlook for the final months of 2022 remains highly dependent on the Reserve Bank of Canada’s monetary policy cycle. There are fears that an over tightening of interest rates may prevent the economic ‘soft landing’ the Canadian economy requires from a record 8.1% rate of inflation in the year to July 2022.

ASSET CLASSES

EQUITIES

Canadian equities were named a safe haven for investors in the second half of 2022 by the National Bank as the natural resources provide a hedge against inflation. They suggested that the lower valuations and high exposure to natural resources in the Canadian equity market made it a ‘natural hedge’.

FIXED INCOME

In fixed income, the recent interest increases have had a largely negative impact on Canada’s largest pension fund, Canada Pension Plan Investment Board, creating a negative 4.2% return in the first fiscal quarter of the year. The issues with global equity markets amidst accelerating inflation have weighed heavily on the fund’s corporate earnings and generated uncertain business and investment conditions. Thus, the fund’s five-year annualised net nominal return fell to 8.7% from the 10% in March.

Whilst the current market volatility has generated concern around the retirement plans of the Canadians, the three-year review of the long term sustainability of the pension plan conducted by the Chief Actuary confirmed the pension remains sustainable.

COMMODITIES

As a result of a sharp reversal of commodity prices of many of Canada’s key exports including copper, crude oil and wheat in July, investor enthusiasm in the resource sector has rapidly declined. Interestingly, commodity analysts and traders had previously suggested the theory of a new economic order blossoming that would power a supercycle similar to the post GFC boom.

Such theory was plausible considering the cyclical nature of commodities which was also seen in the post-GFC supercycle crash. However, as Bart Melek, head of commodity markets strategy at TD securities suggests, forecasters in the commodities sector underestimated the willingness of central banks to hike interest rates to combat inflation. In terms of foreign exchange, two successive disappointing Canadian labour market data releases in combination with the pressure of the ongoing decline in oil prices may prompt the Bank of Canada to ease its interest rate hiking agenda. The BoC has had to be wary of the Fed’s interest rate policies to ensure the Canadian Dollar remains competitive with greenback. America’s influence is further seen on the dollar’s attachment to the US, being named the second-best performer in the G10 in 2022.

Thus, whilst historically Canada’s abundance of natural resources, central to its economic growth, had led investors to endure the peaks and troughs, the current reversing cycle led to a dampening of global growth expectations and hence low demand for its metals and energy.

FX

RISKS

A looming downturn in the economy could test the resilience of the Canadian market. Whilst surging oil and gas prices have helped keep the 9% decrease in Canada’s benchmarks from following the 19% plunge of the S&P500 Index, the index has slid from its record high in March as financials and materials turned negative. Energy stocks dominated in the first half of the year amidst a commodity boom stemming from Russia’s invasion of Ukraine. As oil, mining and financial stocks make up over 60% of the Canadian index, the geopolitical tensions sent prices for commodities and natural resources soaring. However, as the energy price surges are fading amidst growing concerns of an economic slowdown, many investors have fled from the commodity-heavy TSX. Responding to heightened inflation struggles, the Bank of Canada has implemented its biggest interest rate hikes in decades, with the target overnight rate sitting at 2.5% currently. However, off the back of the Bank’s interest-rate lunges, the Canadian market dipped to its lowest point since March 2021. Greg Taylor, Chief investment officer at Purpose Investments, has noted “It’s great to see central banks finally waking up and trying to get ahead of this… but markets hate surprises and this caught a lot of people off guard.” Resultantly, banks and insurers drove the selloff as the S&P/TSX Financials Sector Index tumbled as much as 2.4%, the most in one month, before closing down 1.2%.