Canadian Stocks Erase Year’s Gains, Fall Further Behind US Peers

Geoffrey Morgan and Stephanie Hughes, Bloomberg News

(Bloomberg) -- Canadian stocks erased their gains for the year, defying strategists’ bullish outlook and causing the nation’s shares to fall further behind their US peers.

The S&P/TSX Composite Index slumped 1.9% on Monday to its weakest close since October, leaving it down about 1.1% this year.

The benchmark has struggled to keep pace with gains in US shares since early May, when the AI-driven investing bonanza sent major US technology stocks soaring. The S&P 500 Index is up roughly 12% in 2023 and the tech-heavy Nasdaq 100 has climbed 36%.

One issue for the Canadian index is its weight toward dividend-paying and value stocks, which are struggling as bond yields rise, said Craig Basinger, chief market strategist at Purpose Investments.

“For how many years did investors just increasingly pile money into dividends because yields were so low? That’s clearly reversing right now,” he said. Against that backdrop, utilities, telecommunications and bank stocks are all getting dragged lower, he said.

More Weight

Canadian financial institutions account for 30% of the Toronto gauge, compared with 13% for the S&P 500 Index, data compiled by Bloomberg show. The S&P/TSX banks index is down about 8% on the year, while the equivalent S&P 500 component has lost about 13%, battered in part by the regional banking crisis.

Canadian railways have also had their worst year-to-date performance since 2015, weighing down the index further.

The lackluster performance of Toronto’s key stocks gauge is at odds with the lofty expectations from strategists.

On average, price targets imply roughly 23% upside for the Canadian index, slightly above the 20% potential return analysts foresee for the S&P 500, data compiled by Bloomberg show.

Basinger said he’s underweight equities given the rising yields. Rates on 10-year Canadian government debt are around the highest in more than a decade.

“The TSX has some good things going for it, like its hefty energy weight, but we’re a value and a dividend index and with bond yields moving the way they are, it’s weighing really heavily on the dividend factor,” he said.

(Updates prices.)