Wednesday, August 22, 2012

U.S. stocks widen lead over lagging Canadian equities | Investing ...

As U.S. stock markets probed four-year highs Tuesday, Canadian stock investors were left asking: What gives?

While the S&P 500 index is up more than 12% for the year, the S&P/TSX composite index has posted a measly gain of 1.35%. The Canadian index has lagged U.S. indexes for much of 2012, as it did in 2011, leaving Canadian stocks nowhere near the four-year highs U.S. markets are moving toward.

?The TSX hasn?t done anything since 2010,? said Steven Isenberg, chief executive at M Partners Inc. in Toronto. ?We?ve seen some gains and some losses during that time period, but we?re essentially back to where we started two years ago.?

The S&P 500 briefly hit 1,426.68 Tuesday, its highest intraday level since May 2008. A late-day pullback resulted in the index posting a loss, however, ending the day down 4.96 points, or 0.4%, to 1,413.17. The TSX managed to squeeze out a gain of 40.89 points to 12,116.92. But it is still a long way from returning to the 15,000 level it saw during the heyday of 2008.

We?re essentially back to where we started two years ago

Robert ?Hap? Sneddon, president and portfolio manager at CastleMoore Inc., said given the macroeconomic climate, it?s unlikely the TSX can close the gap between itself and its U.S. counterparts this year.

?If we were to get some sort of mass, co-ordinated stimulus ? meaning China, Europe and the U.S. ? then it?s possible,? Mr. Sneddon said. ?But that scenario I just painted for you is very unlikely.?

Dragging down the TSX this year has been a consistent weakness in commodity prices. In June, Brent crude fell to an 11-month low of US$95.38. Gold, meanwhile, has been stuck at roughly US$1,600 an ounce for much of the year ? down approximately 17% from its peak of US$1920.30 last summer.

Energy stocks make up about 26% of the resource-heavy TSX, while the materials sector, which is composed mostly of mining companies, makes up 18%.

Paul Gardner, partner and portfolio manager at Avenue Investment Management, said despite the poor performance, some attractive opportunities have opened up for investors on the TSX.

?The stocks that have a lot of value right now are the commodity companies,? he said. ?A lot of oil and gas, as well as gold companies ? and these are firms with decent balance sheets ? have been crushed. Their stocks haven?t been this cheap in the last ten years.?

Mr. Gardner said the low valuations allow investors to get some exposure to sectors such as the Canadian oil sands at bargain prices.

?This is the time where you would want to take money off the table ? out of real estate, financials and utilities ? because the whole commodity sector has been washed out,? he said.

Recent bounces in oil prices and metals have given the TSX and commodities some momentum. The index is up 7% since hitting recent lows in May. Mr. Isenberg of M Partners points out, however, that this is more a case of a ?rising tide lifting all boats,? given that markets everywhere have risen during the summer. The S&P 500 is up more than 10% during the same time period.

Mr. Sneddon notes that the TSX benefited from comments made by European Central Bank President Mario Draghi, in which he pledged to do whatever it takes to preserve the euro, calling it ?irreversible.? That, in turn, has driven commodity prices higher on the hopes of further stimulus.

But Mr. Sneddon points out that two weeks after Mr. Draghi made the comments, he still hasn?t clarified what exactly will be done. And with little ammunition left, markets might currently be rallying on hope more than anything else.

?We believe the run we?re on, the one we?ve been on since June, is going to run its course and peter out soon,? said Mr. Sneddon.

Source: http://business.financialpost.com/2012/08/21/u-s-stocks-widen-lead-over-lagging-canadian-equities/

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