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Aug 28, 2019

'A warning sign': Flight to safety accelerates in Canada amid small cap sell-off

What copper and gold are telling us about global growth

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Money flows into Canadian stocks suggest investors have been sounding the alarm about slower growth prospects for months, long before the recent escalation of global trade tensions.

Riskier small cap stocks have lagged their larger peers and the broader market since the end of March, before the price of gold and precious metal stocks started their rally on concern that a trade dispute between the U.S. and China will hamper global growth.

The S&P/TSX Venture Composite Index, where emerging companies are listed, and the S&P/TSX Small Cap Index have climbed 4.6 per cent and 9.8 per cent respectively this year, trailing the 14 per cent gain for the main equity gauge. In the U.S., the Russell 2000 small-cap index’s growth separated from the S&P 500 only in June.

“The market is flashing a warning sign,” said Nicolas Piquard, portfolio manager and options strategist at Horizons ETFs Management (Canada) Inc. “Small cap stocks tend to be riskier than large cap stocks. Since they are smaller, they generally suffer more and have a harder time managing in an economic downturn.”

For investors who want to keep some portion of their portfolio in stocks, large caps may be the way to go as global economic growth slows, he said.

“If the market signals are right, then this would mean we are heading for an economic downturn,” Piquard said. “Large caps would also suffer in such an event, but not as much as smaller caps.”

Global ETF fund flows are painting a similar picture. Small cap exchange traded funds have seen net outflows this year while large cap funds have received over US$38 billion in net inflows, according to data compiled by Bloomberg.

Gold

No doubt, the conventional havens are in demand too. The price of gold has surged 20 per cent this year, and bonds have rallied.

Eldorado Gold Corp. (ELD:CT) is the biggest gainer on the benchmark index with a more than 200 per cent surge this year. 

Gold could rise to $2,000 in the next 5 to 10 years: CPM Group

Jeffrey Christian, managing partner at CPM Group, discusses gold-buying activity from central banks and where the gold rally is heading.

Other producers have also doubled their share price: Alacer Gold Corp. (ASR:CT), Detour Gold Corp. (DGC:CT) and Centerra Gold Inc. (CG:CT)

Silver miners are now eclipsing their gold counterparts as investors pile into the cheaper alternative. The gold-silver ratio is trading at the lowest since Feb. 28, indicating that silver is catching up to gold’s meteoric climb.

And while junior mining stocks make up almost half of the fledgling venture exchange, the lack of production puts them at a disadvantage even as bullion rises.

Stock Exposure

For a large part of this year, both the buy and sell side strategists have advised investors to hold on to their equity exposure and buy the dips. But as market sentiment shifts and trade tensions see no respite, caution now prevails.

“I am encouraging clients to hold as much cash as they can and be patient over the next few weeks,” said Tina Normann, technical research analyst at Eight Capital. “Late September, early October should offer an entry point into economically sensitive cyclicals,” she said.

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