How Did That Happen?

After the worst quarterly returns since 2008, Canadian stocks roared back in January. We look back at what drove the turnaround and provide our thoughts on where domestic equities go from here.

04.25.2019 - Vincent Tonietto - Vice President, Portfolio Manager

How Did That Happen?

By Vincent Tonietto,
Vice President,
Portfolio Manager

Canadian equity markets had investors smiling and scratching their heads in wonder during Q1. After all, the last period of 2018 saw the S&P/TSX Composite Index deliver its worst performance since 2008 and the lowest price-to-earnings (P/E) ratio in six years. In addition, the Canadian dollar weakened further as oil prices declined 38%.1 While US markets proved more resilient in 2018—benefiting from the corporate tax overhaul, record-high share buybacks and a generally healthier US economy—a pall of negative sentiment hung over Canadian equity markets.

Surprising many investors, that very depressed view laid the foundation for Canada’s best January since 1987. S&P/TSX Composite Index performance spiked over 8%, outperforming US markets.2  The P/E ratio expanded 12% during that month, marking the highest expansion worldwide.3

What caused the strong turnaround? Like other markets, the S&P/TSX Composite Index benefited from the US Federal Reserve’s changing tone and resulting pause on further interest rate hikes, along with reduced trade tensions between China and the United States. As importantly, companies listed on the Index generate most of their revenue beyond Canada’s borders, primarily from the United States. As investors realized the market’s steep December decline was disconnected from market fundamentals, Canadian equities were well-positioned to capture the upside. Happily, they did exactly that.

Where do Canadian equities go from here? The path of bond yields, as well as oil and other commodity prices, will be key to the near-term fortunes of the S&P/TSX Composite Index. We expect Canadian equities to follow investors’ sentiment towards global growth. Looking at the United States, valuations, the fading effects of the corporate tax package, and the market’s leadership concentration are sources of concern.

As we advance further in this cycle, there’s less and less room for investor complacency. Our active management approach is based on being selective and taking advantage of imbalances as they present themselves in Canada and around the world.






1.FactSet: WTI prices as at September 30, 2018: $73.16. As at December 31, 2018: $45.15.
2.FactSet: Index performance as at January 1 and January 31, 2019.
3.FactSet: Valuations as at January 1 and January 31, 2019.



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