Forecasting outperformance for the Canadian stock market
What a difference three months makes. The S&P/TSX Composite Index surged 15.97 per cent in the second quarter after a disastrous start to the year, making Toronto’s benchmark stock exchange the 21st best performer among 92 global equity markets, sandwiched between the Euro Stoxx 50 and Ireland. It was the largest quarterly rally since mid-2009, when global markets were exiting the depths of the great financial crisis.
The strength exhibited by the TSX was widespread, with 10 of the 11 TSX subgroups capping off the quarter in positive territory, and 194 of the composite’s 222 individual constituents ending Q2 in the green.
In spite of the gains, the TSX remains 13.54 per cent below its all-time closing high of February 20th, 2020.
The monster rally wasn’t enough to keep pace with indices south of the border, with the S&P 500’s 19.95 per cent gain ranking it ninth in the world, and the Dow Jones Industrial Average’s 17.77 per cent gain placing it 11th. It was the strongest quarter for each index since 1998. Those returns, however, were dwarfed by Argentina’s Merval Index, which took the top spot with a 58.65 per cent gain.
Below, BNN Bloomberg takes stock of the quarter that was on the TSX.
Information Technology: +68.20 per cent
Materials: +41.56 per cent
Consumer Discretionary: +32.01 per cent
The information technology sector continued to be the star performer on the TSX for 2020 with a massive 68 per cent rally in Q2 after a largely flat performance to start the year. Canada’s latest tech darling Shopify Inc. led the way for the group, but the second quarter was far from a one-man show, with all 10 of the subgroup’s constituents finishing in positive territory.
The materials group tracked gold higher as the precious metal breached the US$1,800 mark for the first time since 2011, helping to drive the 41.56 per cent return. Precious metals miners dominated the upper ranks of lead gainers, with OceanaGold Corp., Alacer Gold Corp. and Pan American Silver Corp. all notching triple-digit gains. Though gold was grabbing the headlines through the quarter, base metals miners quietly posted stellar returns of their own, in part due to the nearly 22 per cent rally in the price of copper. In all, only two of the subgroup’s 51 members finished the quarter lower.
The TSX’s most motley group of companies posted the third-best performance of the quarter, with consumer discretionary gaining 32 per cent. The group, which includes autoparts makers, Tim Hortons’ parent company and a casino operator among its ranks, saw all 13 members end the quarter higher, led by recreational-vehicle manufacturer BRP Inc., toymaker Spin Master Corp. and Sleep Country Canada Holdings.
BRP Inc.: +152.18 per cent
OceanaGold Corp.: +134.07 per cent
MEG Energy: + 125.75 per cent
Cenovus Energy: + 123.59 per cent
Shopify Inc.: +118.75 per cent
Shares of BRP Inc. soared in the quarter, gaining more than 150 per cent amid rising demand for its side-by-side offroad vehicles. The company has seen a surge in interest in those offroad vehicles as Canadians are expected to eschew overseas vacations in favour of socially-distanced outdoor activities closer to home, including taking to the trails. In spite of the near-term demand, BRP is expecting revenue to fall as much as 20 per cent into the second half of the year.
OceanaGold Corp. was among the many beneficiaries of the rising price of gold, helping shares more than double through Q2. The company reported all-in sustaining cost per ounce of US$1,218 in its fiscal first quarter, well below the US$1,800 level gold is currently trading at. Oceana, which has operations in New Zealand, the Philippines and the United States, is forecasting higher production and lower all-in sustaining costs in the second half of the year.
The rebound in global oil prices lifted shares of MEG Energy and Cenovus through the second quarter, leading to a more than doubling in share prices of the companies. MEG, which is traditionally highly-sensitive to even modest fluctuations in the price of the underlying commodity, was a choppy ride for investors, regularly posting double-digit moves in a single day.
Tech darling Shopify rounded out the top five, posting a triple-digit return in a quarter that briefly saw it overtake Royal Bank of Canada as the largest publicly-traded company in Canada. The ecommerce platform provider has been seen as one of the winners from the pandemic-induced shutdown of swaths of the domestic economy and subsequent shift to more online shopping. Shopify also inked a deal with Walmart earlier in the Spring to help the big-box behemoth build out its third-party marketplace.
Communications Services: -2.15 per cent
Utilities: +2.69 per cent
Financials: +4.85 per cent
Communications services was the only subgroup to finish the quarter in negative territory, posting a modest two per cent decline, though much of the blame can be pinned on a single stock: Cineplex Inc. The group, which is a relatively small slice of the overall index at 5.8 per cent, was nearly evenly split between winners and losers in the quarter, with three of its eight constituents finishing in positive territory.
The utilities group was essentially flat in Q2, garnering little in the way of investor interest. Many of the members of the group are highly regulated and carry long-term fixed contract rates, meaning short-term fluctuations in the underlying economic picture often have little impact on the rates they can charge customers.
The financials index rounded out the bottom three with a modest 4.8 per cent gain. Concerns over the near-term trajectory of domestic economic growth kept a lid on returns from the big banks, though all of the Big Five financial institutions save Bank of Nova Scotia finished in positive territory. Wealth management firm IGM Financial Inc., Toronto stock exchange operator TMX Group Ltd. and mortgage lender Home Capital Group Inc. were the top performers in the subgroup.
Cineplex Inc.: -31.28 per cent
Sienna Senior Living Inc.: -24.43 per cent
Dream Office Real Estate Investment Trust: -12.08 per cent
Nutrien Ltd.: -9.33 per cent
Loblaw Companies Ltd.: -8.88 per cent
Allied Properties Real Estate Investment Trust: -8.45 per cent
The hits keep coming for Cineplex Inc. The nation’s dominant theatre operator was forced to shutter its theatres in the second quarter as health officials looked to stem the spread of the COVID-19 virus, leading to a plunge in revenue and a warning over its ability to continue as a going concern. The company also saw its $2.15-billion deal to sell itself to U.K.-based Cineworld Group PLC collapse after the British movie theatre operator claimed Cineplex breached the terms of the deal, helping to drive shares of Cineplex to an all-time low. The company is looking to reopen some theatres with social distancing rules in effect in the coming months, but may face a dearth of content to offer theatregoers as many film distribution houses have pushed out the timing of their blockbuster releases into the end of the year.
Sienna Senior Living Inc. was caught in the maelstrom of the COVID-19 virus, with the long-term care home operator being one of the hardest hit by the virus outbreak. The company operated one of the facilities where Canadian Armed Forces were sent to bolster care efforts for seniors in the depths of the crisis. Former President and Chief Executive Officer Lois Cormack abruptly resigned from her post on June 12th, and was replaced by the company’s CFO Nitin Jain.
Concerns over the long-term impact of the current work-from-home regime pressured shares of Dream Office REIT and Allied Properties in the second quarter. The office REIT sector has been dogged by questions over whether companies will return to their normal course of operations after a number of firms, including Shopify, declared that once the pandemic has passed they have no intention of returning to the status quo in terms of the number of workers in the office.