Jun 30, 2022
We're #58! TSX stumbles as interest rate, recession fears rise
TSX info tech group down 54% this year
The S&P/TSX Composite Index capped off the front half of the year in negative territory, falling 11.13 per cent to rank 58th out of 92 of its global peers. The drop has the Toronto benchmark sandwiched between Latvia’s Riga Stock Exchange and the Slovenian blue-chip index. The performance badly trails the leader so far this year – the tiny Beirut Index, with only 10 constituents, is up 39.06 per cent.
The TSX has been caught in the same downdraft as many other indices in developed markets, with concerns over rising rates and the potential for them to push the global economy into recession. However, the TSX has outperformed the Dow Jones Industrial Average – in 66th – and the S&P 500 – 80th – due in part to Canada’s relative dearth of rate-sensitive tech stocks.
Canada’s traditional reputation as drawers of water and hewers of wood came in handy so far this year, as multi-year high oil prices helped buoy the energy sector, which is the TSX’s second-largest weighting at 18 per cent. Here’s a look at how 2022 has played out through the close of trading Wednesday:
Energy: +23.5 per cent
Utilities: -0.6 per cent
Consumer Staples: -1.74 per cent
The energy index was the lone bright spot through the first six months of the year, bucking the overall negative trend. Nearly all of its constituents were in positive territory, with four uranium plays (Cameco Corp., NexGen Energy Ltd., Denison Mines Corp. and Energy Fuels Inc.) in the red. The group got a lift not only from oil prices running at multi-year highs, but also from the surge in natural gas prices as the Russian invasion of Ukraine triggered global supply fears, in particular for gas-dependent Europe.
There was a distinct bifurcation when it came to the performance of utilities, with a split of seven members up and nine members down to start the year. A pair of companies with exposure to renewables led the way amid those sky high energy prices with Boralex Inc. leading the pack, up 23 per cent, followed by Capital Power Corp. Interestingly, Boralex also has renewables exposure in France, which has felt some of the pain of its European neighbours during the energy crunch on the continent.
It was a similar story for the consumer staples subgroup, with decent performances from the big grocers offsetting weakness across the rest of the group. Loblaw Companies Ltd. led the way with a 12 per cent gain, with Metro Inc., George Weston Ltd. and Empire Co. rounding out the positive performances. The other seven group members are entering the back half of the year lower, with Premium Brands Holdings Corp. posting the weakest results.
Info tech: -55.3 per cent
Health care: -54.2 per cent
Real estate: -22.9 per cent
It’s been an absolutely disastrous start to the year for the once high-flying info tech subgroup, with the same rate concerns that have hampered tech titans south of the border weighing on the group. Shopify Inc. has been far and away the worst performer, down 77 per cent in just the last six months and wiping out about $170 billion worth of shareholder value. Shares of legal software provider Dye & Durham Ltd. were cut in half through the first half to rank as the second worst-performer, but there was no place to hide in the group, with all 14 constituents in the red.
It was yet more pain for pot producers to start 2022, helping drag the health care index to the second-worst showing. Aurora Cannabis Inc. led the way lower, shedding 75.2 per cent of its value, extending its spectacular decline. All seven members of the group – which beyond the pot stocks includes retirement home operators and Bausch Health Co. – are lower so far this year.
The real estate sector rounds out the bottom three, again with all 23 members ending the first half lower. A confluence of factors are weighing on the sector, between rising rates increasing the cost of financing new developments and the threat of slowing housing activity hitting firms that provide real estate services, including FirstService Corp., the worst performer of the lot.
Shopify Inc.: -76.9 per cent
Aurora Cannabis: -75.2 per cent
Bausch Health Cos: -69.2 per cent
Unsurprisingly, the three worst performers come from the info tech and health care groups, with Shopify posting the worst showing among all 239 TSX constituents. It’s been a stunning fall from grace for the once-high flying tech darling, which at one point briefly eclipsed Royal Bank of Canada as the country’s most valuable public company. There have been mounting concerns over the slowdown in e-commerce activity as shoppers return to stores with the darkest depths of the pandemic behind us, hammering stocks in the sector. The company missed first-quarter profit and revenue expectations as those trends took a toll, helping send it to bottom spot on the composite.
Aurora Cannabis has become something of a poster child for the struggles of the cannabis sector since legalization – the pot producer has now lost 99 per cent of its value since its Oct. 2018 peak. The entire industry has struggled, but none more than Aurora, which has struggled to reach profitability and has shuttered facilities – including the massive Aurora Sky grow-op outside Edmonton – due to overbuilt capacity in the Canadian cannabis market.
Bausch Health was actually performing adequately, if unspectacularly, for the first few months of the year before the wheels started to come off. The company formerly known as Valeant Pharmaceuticals – another firm that once surpassed RBC in market value – ran into trouble as the year wore on with shares plunging in the wake of a weak first-quarter earnings report, where the company also trimmed its forecasts. More recently, Bausch put plans to spin out its Solta skin care business on hold, citing challenging market conditions.
Athabasca Oil: +109.2 per cent
Spartan Delta: +107.2 per cent
Precision Drilling: +85.1 per cent
After the massive run in oil and gas prices, the top of the charts is dominated by names tied to the energy patch. It’s been neck and neck between Spartan Delta Corp. and Athabasca Oil Corp, so far this year, both up in the neighbourhood of 110 per cent, followed by Precision Drilling Corp.’s 85 per cent return.
Those strong performances are actually what made all three companies eligible for this list, as they were all added to the S&P/TSX Composite Index itself on June 3. Inclusion in the index forces funds that track the TSX to buy up shares of companies added to accurately represent the performance of the index.
Athabasca has been buoyed by oil prices holding well above US$100 per barrel. The company recently announced it was earmarking all of its free cash flow to paying down debt as a result of some strong results, with a goal to cancel a total of $175 million in debt by the first half of next year.
Similarly, gas-heavy Spartan Delta – about 63 per cent of its production is natural gas – is coming off a record quarter of funds from operations, and reported overall output rose 127 per cent year over year. But perhaps the biggest news came back in March, when Russian billionaire Igor Makarov’s Areti Energy slashed its stake in the Albertan producer before being hit by sanctions.
The rebound in activity in the energy patch has been a boon to Precision Drilling, helping boost revenue by 49 per cent year-over-year in the first quarter. The company says drilling activity in Canada now matches 2018 levels, with all indications the momentum will continue through 2022.