Canadian and global stock markets in 2015

Michael Zienchuk, MBA, CIM
Manager, Wealth Strategies Group

In 2014, the leading North American stock indices continued growing, albeit less strongly than in 2013. In 2015, the growth seems to have further slowed down. This year to date, the S&P/TSX Composite, the DJIA and S&P 500 indices have grown by just 1%-2% (see the table).

Table 1: Leading North American stock indices in 2013-2015

Index	Return 2013	Return 2014	Return 2015 YTD
S&P/TSX Composite index	9.6%	8.9%	1.8%
Dow Jones Industrial Average	26.5%	8.5%	1.0%
S&P 500	29.6%	12.4%	2.4%

Source: Yahoo Finance

Both U.S. and Canadian economies have not helped their respective stock indices lately. After posting 4+% rates of growth in the second and third quarters of 2014, the US GDP grew by 2.2% in the fourth quarter and by 2.4% in 2014 overall. It was first thought that, in the first quarter this year, the American GDP virtually stopped growing by adding just 0.2%. The new estimate, issued last week, showed that it actually declined by 0.7%. This anemic expansion or even contraction of the economy has made investors re-evaluate their forecasts for a strong recovery which they made in 2013-14 as they bid up prices for U.S. stocks.

The U.S. corporate earnings are suffering mainly due to the strong U.S. dollar and corresponding lower overseas revenues. The total revenues for S&P 500 companies declined in the first quarter by 2.9%, the largest year over year decline in revenues since the third quarter of 2009. Adjusted pre-tax corporate profits fell 5.9% in the first quarter of 2015 and declined for the second quarter in a row for the first time since the 2007-2009 recession.

In Canada, the economy is suffering from weak commodity prices – in particular, oil prices. Over the past 12 months, the price of oil has dropped by more than 40%. Canada’s GDP grew by just 0.6% in the fourth quarter of 2014, and dropped by 0.6% in the first quarter of 2015, which was the biggest decline in almost six years. The IMF expects that Canada's GDP will rise by 2.2% in 2015, down from the January estimate of 2.3% and from a 2.5% growth rate in 2014.

The unimpressive economic performance in the first quarter of 2015 and prospects of a contraction in liquidity in the markets have contributed to the anemic stock market performance. The whole recovery of the U.S. economy since the 2007-2009 crisis continues to look quite fragile. Since early 2010, the United States has had three quarters when its GDP growth was below 1% and three quarters when it was in negative territory. While it had been widely expected for some time that the U.S. Federal Reserve would start raising interest rates, this kind of weak recovery keeps pushing this event further into the future.

That said, not all sectors of the equity markets have performed poorly in 2015. It is worthwhile identifying which industry sectors have performed well over the past five months (January-May 2015) within this weak economic environment.

Table 2: TMX GIC Sector Index Returns January – May 2015

	2015 YTD Return	Weight
S&P/TSX Composite Index	3.0%	100.0%
Health Care Index	29.8%	3.0%
Information Technology Index	7.6%	1.8%
Consumer Discretionary Index	7.0%	5.5%
Materials Index	2.4%	11.9%
Consumer Staples Index	1.5%	3.1%
Telecom Services Index	-0.4%	4.9%
Utilities Index	-1.2%	1.8%
Financials Index	-1.7%	35.3%
Energy Index	-2.0%	24.8%
Industrials Index	-4.3%	7.9%

Source: web.tmxmoney.com, UCU Wealth Strategies Group

Three sectors in particular – Health Care, Information Technology and Consumer Discretionary – have carried the S&P/TSX Composite Index into positive territory so far in 2015. Unfortunately, these three combined only account for 10% of the total index weight.

The S&P/TSX Capped Health Care Index has returned almost 30% year-to-date. The index is comprised of five stocks, two of which have shown strong returns this year. Valeant Pharmaceuticals International, Inc. (VRX:TSX) has risen in value by about 75%. The company’s market capitalization exceeds $102 billion. Concordia Healthcare Corp.’s stock (CXR:TSX) has also risen by almost 75%. The company’s market capitalization is almost $3 billion.

In the Information Technology sector, there were two clear winners in terms of price growth. Constellation Software Inc. (CSU:TSX) has returned 48% YTD. Its market capitalization is $10.8 billion. Redknee Solutions Inc. (RKN:TSX), which provides communication software products, solutions and services, has grown 30% YTD. Market capitalization is about $534 million.

In the Consumer Discretionary sector, the leaders were: Martinrea International Inc. (MRE:TSX) which is engaged in designing, engineering, manufacturing and selling metal parts, assemblies and fluid management systems and is focused on the automotive sector. The shares have risen 35% YTD, while its market capitalization is $1.2 billion. Amaya Inc. (AYA:TSX), an online gaming company. The shares have risen 20% YTD, and its market capitalization is $4.6 billion.

In markets where there is uneven performance between industry sectors, and general economic growth is very uneven, active management becomes critical in delivering returns. This is a stock pickers market.

Michael Zienchuk, MBA, CIM

Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
mzienchuk@ukrainiancu.com
www.ukrainiancu.com

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