Value rotation helped the TSX outperform U.S. counterparts in Q1: Fiera's Bangsund
The S&P/TSX Composite Index got off to a solid start to the year, posting a 7.37 per cent gain through the first quarter to rank 34 among its 92 global market peers. More specifically, the TSX is sandwiched between the Bloomberg European 500 Index and Mexico in terms of major market performance.
Toronto’s benchmark stock index has seen a degree of strength across the board to start 2021, with all but two of the 11 subgroups trading in positive territory.
While that gain dwarfs the TSX's 2.17 per cent advance through all of 2020, it’s no match for the best performing index on the planet so far this year: Mongolia, where the benchmark index posted a 79.6 per cent gain in quarter. Mongolia's gains were led by the Apu Company Ltd., the nation’s largest producer of vodka and beer.
Here’s a look at how things have played out so far this year on the TSX:
Top performing sectors:
Health Care: +37.9 per cent
Energy: +18.9 per cent
Financials: +12.8 per cent
Consumer Discretionary: +12.0 per cent
Real Estate: +9.0 per cent
The pot stock-heavy health care index left the rest of the composite in its dust to start the year, posting a nearly 40 per cent gain.
Sentiment surrounding the pot sector has markedly improved in the wake of last year’s U.S. elections, as the prospects for further legalization of recreational cannabis got a boost from the so-called blue wave that gave the Democrats control over the White House, the House of Representatives and Senate. New Jersey, Arizona, Montana and South Dakota all voted to legalize recreational cannabis in November’s election, which raised hopes already-established cannabis companies could gain access to the world’s largest market for the product.
Eight of the 10 constituents of the subgroup capped off the quarter higher, with only Trillium Therapeutics Inc. and Aurinia Pharmaceuticals Inc. ending the quarter in the red.
The energy group’s strong start to the year can almost entirely attributed to the rebound in global oil prices. A combination of optimism over COVID-19 vaccine rollouts, the prospect of economic reopenings and short-term disruption from the Suez Canal blockage helped keep crude prices within striking distance of US$60 per barrel, a 22 per cent increase from a year ago.
While there remains some uncertainty over the trajectory of oil demand growth in the near term with the spread of new COVID-19 variants, there is some optimism a return to normal consumption will come soon. The International Energy Agency forecasts the world will recoup the nine million barrels-per-day of demand lost due to the pandemic by 2023.
As a result, all but one of the TSX energy group’s 24 members posted a positive return in the first quarter. Gas station operator Parkland Corp. was the lone decliner in the group.
That optimism over the pace of economic reopenings has been a boon for the banking sector. Interest rates, however, have been creeping higher. That typically helps out large lenders by easing net interest margin compression caused by rock-bottom rates. The banks also released some of the funds they set aside for potentially sour loans throughout the pandemic, as the worst economic damage feared failed to pass. Paired with a boom in housing market activity and a flurry in mortgage lending, that helped all 28 members of the Financials subgroup post positive returns in the first quarter.
Top performing stocks:
Aphria Inc.: +162.5 per cent
Organigram Holdings Inc.: +156.8 per cent
Crescent Point Energy Corp.: +76.1 per cent
Denison Mines Corp.: +63.1 per cent
Vermilion Energy Inc.: +61.1 per cent
The pot stock dominance of Q1 was exemplified by shares of Aphria Inc., as optimism over U.S. legalization and some fresh consolidation in the Canadian cannabis sector boosted stocks. Aphria was one of the poster children of that consolidation trend, agreeing to snap up pot rival Tilray Inc. in a deal announced late last year. Under the terms of the deal, Aphria shareholders will own 62 per cent of the combined company, which is poised to own about one-fifth of the Canadian cannabis market, surpassing rival Canopy Growth Corp. That deal is expected to close sometime in April.
Organigram Holdings Inc.:
Not to be outdone, shares of Organigram went on a tear to start the year, rising more than 150 per cent. The Moncton, N.B.-based pot producer struck a deal of its own in the quarter, agreeing to sell a 19.9 per cent stake to a subsidiary of British American Tobacco for $221 million in early March. In conjunction with the deal, the company said it would work with BAT to build a research facility at Organigram’s Moncton headquarters to develop next-generation cannabis products as the domestic market continues to mature.
Crescent Point Energy Corp.:
As goes oil, so goes Crescent Point Energy. Shares of the light and medium oil producer are typically highly sensitive to even small moves in the price of the underlying commodity. That helped to push the company into the third spot among TSX top performers. Crescent Point has been far from shy about making moves in the current oil price environment, striking a $900 million deal to buy Royal Dutch Shell plc’s Duvernay assets in February, a deal that added about 30,000 barrels of oil equivalent per day to its production profile. Crescent Point also is aggressively paying down its debt over recent years, paring its debt load by $600 million last year.
Worst performing sectors:
Materials: -7.2 per cent
Information technology: -0.9 per cent
Consumer Staples: +2.1 per cent
Utilities: +2.5 per cent
Communications Services: +6.0 per cent
Precious metals lost their lustre to start the year after a banner 2020. Gold posted its worst start to the year since 1982, falling 11 per cent as the prospects for economic reopenings dampened demand for the metal as a safe-haven play. The rise in benchmark U.S. government bond yields and accompanying strength in the greenback typically sends the price of the precious metal lower, as investors can pick from a range of yielding assets rather than park their money in gold.
The Information Technology group also came back to earth to start the year. The tech sector finished the quarter largely flat, with the likes of legal software firm Dye & Durham, supply chain management firm Kinaxis Inc. and market darling Shopify Inc. dragging on the overall performance of the group. That was enough to offset gains posted by BlackBerry Ltd., which finished the quarter 27 per cent higher after going on a Reddit-fuelled rollercoaster ride. The online group of retail investors sent shares of the Waterloo, Ont.-based software company surging during a wild February trading binge.
The Utilities subgroup eked out a modest gain in the first quarter, as rising rates took some wind out of its sails. The subsector typically performs well in low-rate environments, as a combination of the hunt for yield drives demand for the dividend-heavy sector. Rock-bottom rates also support the capital-intensive expansion of major utility networks like power grids and pipelines. While the group did rank as the fourth-worst performer on the index, the losses were concentrated among a handful of names with only six of the group’s 11 components finishing the quarter in negative territory.
Worst performing stocks:
New Gold Inc.: -30.4 per cent
SSR Mining Inc.: -29.7 per cent
Silvercrest Metals Inc.: -28.1 per cent
Trillium Therapeutics Inc.: -28.1 per cent
Silvercorp Metals Inc.: -27.3 per cent
New Gold Inc.:
The slide in gold prices took its toll on New Gold in the first quarter, cutting shares to the tune of more than 30 per cent. The company, which has a pair of operating mines in Canada, expects production to essentially flatline over the course of this year. The company also ran into tragedy earlier this year, after a worker at the New Afton mine was killed during a mud-rush incident and portions of the mine were closed for several days.
SSR Mining Inc.:
SSR Mining suffered much of the same fate as its precious metals peers, as the weakness in gold and silver prices weighed on the sector. The company, which has production-stage mines in Turkey, the U.S., Canada and Argentina, produced about 708,000 ounces of gold equivalent in fiscal 2020. Costs remain a concern after SSR exceeded its internal estimates for all-in sustaining costs per ounce.
Trillium Therapeutics Inc.:
Trillium’s tough start to 2021 comes with something of an asterisk, as its nearly 30 per cent drop comes after shares rallied an eye-popping 1,308 per cent over the course of 2020. That rally made Trillium by far the top performer on the TSX that year. The clinical-stage developer of cancer treatments had a relatively quiet 2021 as it continues to work on immunotherapy treatments on cancer cells. Trillium’s net loss widened to $59.3 million in its latest quarter, mostly due to an accounting revaluation of some deferred share unit liabilities.