Team PolyFinances
Monthly Review – November 2022
Basic Consumption
By Myriem Merini
As can be seen in the chart below which compares the price performance of the Canadian Consumer Staples Index with its benchmark, the S&P500/TSX Composite, the Consumer Staples sector has done well this month. Indeed, the sector recorded a return of 4.76% as of November 29 compared to the beginning of the month. It is therefore just ahead of its benchmark index. It should be noted, however, that during the first half of the month, the sector was in deficit for almost the entire period. However, this is not a situation specific to the sector, at least for the beginning of November, since the overall index is undergoing a similar variation. This was primarily due to the release of third quarter financial results, which for 70% of S&P500 companies were better than expected. Canadian companies in the S&P500/TSX experienced a similar scenario with an even better average profit margin.
Figure 1: Comparative chart of the performance of the S&P 500/TSX and the TTCS.
In sector news, overall prices for food and alcohol and tobacco rose by 0.4% and 0.5% respectively, which is still high, although it is the lowest growth in four months and one of the lowest compared to other categories. This is still encouraging for the sector and the prospects for a return to normal inflation. Furthermore, with inventories once again high, a significant drop in supply chain costs, and a downward revision of selling prices by Chinese producers, as seen in the chart below, coupled with a slowing global economy, is encouraging for this sector of the economy.
Figure 2: China’s Producer Price Index, Canadian Core CPI and Canadian Import Prices.
Finance
By Sophia Mounis
The financial sector performed relatively well in November compared to the previous month. This is illustrated in Figure 3 below.
Figure 3: November’s performance : XFN et S&P/TSX. (TradingView.com 2022)
As shown in Figure 3, the financial sector appears to have performed relatively well throughout November. Indeed, the XFN was up 5.96% as of November 30, as was the TSX, which was up 5.29%.
Towards the end of the month, the banking gains of various banks were revealed. The National Bank of Canada reported net income of $738 million, lower than a year earlier, as it decided to set aside $87 million. This money would be used to address potential credit losses and is a larger amount than last year’s $41 million. Diluted earnings per share were $2.08, compared to $2.19 in the same quarter last year. Furthermore, there was a 4.94% difference in earnings per share since the last quarter.
The month of November was characterized by the Bank of Canada’s loss of $522 million, an event never seen before. Thus, the central bank of Canada has experienced losses and the solutions are yet to be determined. According to the Governor of the Bank of Canada, Tiff Macklem, this event is related to accounting problems and its importance will depend on decisions regarding the future variation of interest rates.
Furthermore, there are many reports that suggest that the Bank of Canada will raise rates again. Indeed, despite a favorable performance of the economy in the third quarter, the last quarter will probably be characterized by an annualized growth of 0.5%, according to the Bank of Canada. According to CIBC representative Andrew Grantham, the rate hike could be similar to the one in October, which was 50 basis points.
Industries
By Victor Darleguy
During the month of November 2022, the Canadian Industrial Sector Stock Index, TSX Industrials Capped Index (TTIN), presented a +4.67% performance, rising from 380.5 as of 10/29/22 to 398.26 as of 11/29/22 (theglobeandmail, 2022). The Canadian Industrial Sector Index (TTIN) outperformed the S&P/TSX Composite Index (TSX) by 1.23 times, but still underperformed the U.S. S&P 500 Industrials Index (S5INDU), which outperformed the TTIN by 1.19 times.
Figure 4: Evolution of the main indexes and their industrial sub-indexes on the Canadian and American stock market during the month of October 2022. (https://www.tradingview.com/chart/FYwjBbR7/)
The performance of the Canadian industrial sector is followed by the growth of Bombardier Inc Cl B Sv (BBD-B-T) stock, which performed +20.54%. Indeed, Bombardier reported “an ‘impressive’ increase in operating profit in the third quarter on the back of higher margins on its Global 7500 aircraft and progress in its cost structure” (BFMbourse, 2022), which led to growth in Bombardier’s Cl B stock on the Toronto Stock Exchange. But another TSX stock is surfacing on the positive list: Finning International Inc (FTT-T). Once again, the Caterpillar machinery distributor is outperforming all expectations with a +17.64% gain. It would be natural to think that such a move heralds the company’s tipping point, but analysts remain lukewarm about Finning’s efforts to reduce operating costs and improve profitability (LesAffaires, 2022).
After a significant drop in its share price following the announcement of its poor Q1 results, CAE saw a sudden rise in its share price when it released its Q2 results on Thursday, November 10.
Real Estate
By Dounya Iddir
The real estate market has seen a 3.3% decrease in residential property sales compared to October, according to the Canadian Real Estate Association. This decrease is explained by the increase in interest rates.
Compared to November of the previous year, the number of transactions dropped by 38%, reaching 2716 in November 2022.
Figure 7: Comparison of the S&P Composite and S&P TSX REIT Indices
As shown in Figure 7, the prices of the S&P Composite index, which measures the performance of the Toronto Stock Exchange, and the S&P TSX REIT index, which tracks the earnings of real estate investment trusts in Canada, are following the same trends, with an approximate 10% difference in price.
Over the next few months, there will be further increases in the policy rate, including the December 7th increase. Real estate prices are likely to fall soon, but interest rates are likely to remain high for an indefinite period.
Basic Materials
By Olivier Larochelle
November was a strong month for the basic materials sector. The XMA.TO Index (blue), an ETF targeting Canadian materials companies, grew by 8.8%, outperforming the index measuring the performance of the Toronto Stock Exchange as a whole (orange), which grew by 3.8%.
Figure 8 : November performance of the XMA.TO and S&P/TSX
Like some other precious metals, the price of gold experienced a nice increase in November, which it is maintaining for the moment. This rise is of great importance to Canada as the country is the 5th largest gold producer in the world. For this reason, the S&P/TSX Capped Materials Index is heavily exposed to the gold sector, which now occupies half of the portfolio, or 50.02%.
During the month of November, this material increased from 2225.50 $CAD/ounce to 2375.45 $CAD/ounce, a growth of 6.17%. This was due to a series of events. First, in its November FOMC minutes released earlier this month, the U.S. Federal Reserve indicated a potential slowdown in its interest rate hike cycle. This news caused the U.S. dollar to weaken and as gold reacts inversely to the direction of the dollar, its price rose.
Many Canadian gold companies benefited from this phenomenon, including Franco Nevada Corp, which saw its stock rise by 14.1% in November, and Agnico Eagle Mines Ltd, which rose by 9.7%. The two companies occupy 10.13% and 8.59% of the XMA.TO exchange traded fund, respectively. These and a few other precious metals companies had a big impact on the performance of the Canadian materials ETF.
Health
By Shawn Daswani
For the month of November, the health care sector is in a good position, we notice that the S&P index has increased by 1.26% since last month. The impact of Joe Biden’s decriminalization of drug possession is still being felt. The companies that produce recreational and medicinal cannabis are the ones that are benefiting the most now. We can see in the following figure that the index went up in one swoop on November 9 from 21.89 to 24.51 on November 11.
Figure 9: Change in the S&P/TSX Healthcare Index over a month
We notice in the following figure that the company Canopy Growth is still rising. A rise of 2.32% this month for the new Canadian company that is trying to enter the cannabis market in the United States. 
Figure 10: Canopy growth evolution
However, the barrier to entry is very high for the cannabis market right now with several companies making over a billion dollars a year in revenue like Trulieve Cannabis for example. A large amount of money needs to be invested in Canopy Growth to reach the level of its competitors. It remains to be seen in the coming months if this new Canadian company will succeed in breaking into the American cannabis market.
Information Technology
By Mathias Malhotra
During the month of November 2022, the Canadian information technology has closed slightly higher than where they opened. The XIT shows an increase of 3.55% from November 1st to November 30th. In that period, we can see a sharp drop in stock value of the sector around November 3rd which is correlated to the Fed’s decision of hiking interest rates an additional 75 basis points. It was anticipated but some had hopes it would only be 50 basis points. The move impacted Canadian stocks as well because many of them have a part of their business tied to the U.S economy and because the Canadian Central Bank often takes similar decisions when it comes to interest rates. It’s why Canadian investors fear that a similar hike of interest rates could be in the horizon for Canada as well. Interest rates greatly affect the information technology sector because 5g networks companies tend to have a lot of debt and the rest of the sector is mostly growth orientated and it’s difficult to grow substantially in a high interest rate environment without taking loans.
Fortunately, that fear dissipated, and the information technology sector finished strong as we can see in the chart.
Figure 11 : XIT and Telus performance in the month of November compared to the TSX and SP500
XIT was up 3.55% over the course of the month which is a strong return and it also beat the TSX and SP500 return which shows actual strength in the IT sector not just favorable macro-economic trends.
Many companies have reported their earnings in the month of November and the stock price action after those earnings seem to indicate that investors are mostly searching for stability in certain sectors such as 5g network. Telus released earnings that beat on top and bottom line and announced a dividend increase which investors saw negatively fearing their cash flows can’t justify and sustain the new dividend. On the other hand, BCE has missed earnings expectations, but the stock has performed better than Telus, because investors feel confident that the dividend is sustainable.
Magnet Forensics which is a cyber security company has seen its stock go through the roof after a great earnings forecast which indicates the company should grow revenues at an average of 23% for the next three years. The stock is up 42% in the month of November and now has a market cap of 1.47B. Obviously, Magnet Forensics stock didn’t impact greatly the return of XIT, but it has positively impacted, investor view on cybersecurity as well as other less mainstream IT sectors in Canada.
Utilities
By Alessandro Sassano
Over the past month, the utilities sector has underperformed versus the Canadian market. This is characteristic of the sector, which acts as a safe investment with slow growth that acts as a hedge against the market. Therefore, when the market performs well, the utilities sector tends to see more modest growth compared to other sectors. This can be observed in the sector’s monthly performance of -0.95% versus the market’s growth of 5.04%. So long as the market continues to see a recovery, the utilities sector is projected to underperform versus the TSX.
Additionally, the sector’s losses can be attributed to a surge in costs for energy operators. Inflation, maintained high natural gas prices, and rising interest rates are leading to power providers struggling to recover their costs [12]. These issues, unfortunately, are very likely to persist into the near horizon. However, the good news is that despite a combination of an unfavorable market and macroeconomic conditions affecting their bottom line, utilities companies are fending off any significant drops. This resilience, paired with a dividend yield that is still above the treasury bond rate, are allowing utilities stocks to live up to their reputation as a stable investment, regardless of market conditions.
Figure 12: S&P/TSX Capped Utilities Index
References
TradingView. [Market research]. https://fr.tradingview.com
https://www.theglobeandmail.com/business/economy/article-statistics-canada-third-quarter-gdp-2022/
https://financialpost.com/fp-finance/banking/national-bank-raises-dividend-profit-falls
https://financialpost.com/news/economy/bank-of-canada-interest-rates-inflation
https://financialpost.com/fp-answers/why-bank-of-canada-losing-money
https://www.cbc.ca/news/business/canada-gdp-september-q3-1.6667620
TSX Industrials Capped Index. (2022, 29 novembre). The globe and mail. https://www.theglobeandmail.com/investing/markets/indices/TTIN/components/
To watch: Lassonde Industries, Innergex and Finning.(2022, 9 novembre). Les Affaires. https://www.lesaffaires.com/bourse/analyses-de-titres/a-surveiller-industries-lassonde-innergex-et-finning/637491/3
Bombardier: Stock rises after ‘solid’ quarter. (2022, 6 November). BFM Bourse. https://www.tradingsat.com/actualites/informations-societes/bombardier-le-titre-grimpe-apres-un-trimestre-solide–1042723.html#:~:text=(CercleFinance.com)%20-%20Bombardier,de%20sa%20structure%20de%20coûts
https://www.rncan.gc.ca/nos-ressources-naturelles/mines-materiaux/faits-mineraux-metaux/faits-sur-lor/20587https://www.barchart.com/stocks/quotes/$DXY/technical-chart?plot=BAR&volume=0&data=WO&density=X&pricesOn=1&asPctChange=0&logscale=0&sym=$DXY&grid=1&height=500&studyheight=100https://www.barrons.com/articles/why-gold-and-silver-prices-surged-today-51667953747https://capital.com/gold-price-forecasthttps://or.fr/cours/or/cad#historical-charthttps://www.blackrock.com/ca/investors/en/literature/fact-sheet/xma-ishares-s-p-tsx-capped-materials-index-etf-fund-fact-sheet-en-ca.pdf
https://www.fool.com/investing/2022/11/16/why-marijuana-legalization-could-be-bad-news-for-c/
Investing in Tech: Top Canadian Tech Stocks of November 2022 | The Motley Fool Canada
Magnet Forensics Third Quarter 2022 Earnings: Beats Expectations (yahoo.com)
TELUS (TU) Q3 Earnings & Revenues Top Estimates, Increase Y/Y (yahoo.com)