Team PolyFinances
Monthly Reviews – Mars 2022
Consumer Staples Sector
By Myriem Merini
As for the basic consumption sector, it can be noted that its index recorded a weak performance equivalent to less than 1% for the month of January, which is significantly lower than the performance of the benchmark index, which is just under 6%.
Figure 1: Comparative chart of the performance of the S&P 500/TSX and the TTCS.
Several factors have disrupted the sector in recent months, including rising food prices due to shortages of certain commodities such as vegetables and eggs. Inflation and significant logistical problems in the supply chain have also been linked to this increase. However, companies in the sector have announced significant investments to improve the stability and sustainability of their supply. Canada’s federal and provincial governments have also announced measures to support companies in the industry. The graph below shows the evolution of inventory levels following the implementation of these measures until they reach a pre-pandemic level.
Figure 2: Graph illustrating the evolution of inventory levels for several industries.
Note that this inventory rebuilding is responsible for the moderation in the market, which has had an impact on industry growth. With this comes a slowdown in employment in Canada, which is also synonymous with a slowdown in purchasing power, which illustrates a rate that is not keeping pace with inflation. The imbalance therefore directly impacts the consumer sectors.
Figure 3: Graph showing the evolution of hiring.
As for the consumer price index (CPI) for basic goods, it fell again this month, which is a good sign for the industry. However, monetary tightening policies have certainly contributed to the stagnation in the consumer staples sector and probably the economy in general.
Finance
By Alexandre Dumontier
In January 2023, the Bank of Canada decided to raise its overnight rate by 25 basis points to 4.50%. This increase is in line with market expectations and marks the eighth consecutive rate increase by the Bank. This brings the Bank of Canada’s policy rate to its highest level in 15 years. The total tightening since March 2022 is now 425 basis points. The Bank also announced that it will continue to follow its quantitative tightening program, which includes passively reducing its holdings of Canada bonds. In the first half of 2023, the Bank’s balance sheet is expected to decline by $51 billion (in nominal terms), up from $41 billion in the second half of 2022. The following figure represents the relative performance between the XFN and the TSX.
Figure 4: January’s performance : XFN et S&P/TSX. (TradingView.com 2023)
As shown in Figure 4, the Financial Sector Index (XFN) appears to have outperformed the main stock index measuring the performance of the Toronto Stock Exchange (TSX). The XFN was up 7.34% as of January 31, while the TSX was up 6.47%. On the other hand, CFIB’s Business Barometer, which measures small business confidence for the next 12 months, rose to 51.4% from 50.9% in December. The health care (+4.1 points, to 60.3) and finance/insurance (+3.4, to 55.4) sectors saw the largest increases. Supply chain issues eased, with only 15.3% of firms reporting input shortages limiting their growth (down from 33.5% in April 2022). Distribution issues have also declined, with 16.1% of firms down from 28.4% in early 2022. As a result, expected prices for the next 12 months fell to 3.6%, the lowest level since July 2021.
Industries
By Victor Darleguy
The beginning of 2023 looks difficult for the Canadian industrial sector, which sees its S&P/TSX Capped Industrials Index (TTIN) present an overall performance of +4.56%, compared to 5.47% for the S&P 500 Industrials (S5INDU), and which underperforms the TSX Composite Index by 2.81%, thus also dragging it down.
This poor performance can be explained by the economic uncertainty of the recession, which has executives such as Tracy Robinson, CEO of Canadian National Railway Co., worried about the industry’s expected slowdown in 2023, which caused the TSX Industrial Index to fall about 2.5% on January 24, 2023.
CN announced that, despite a spectacular performance in the fourth quarter of 2022, with a 21.5% increase in revenues, 2023 would prove much more difficult. Indeed, in a conference call on Tuesday, CEO Tracy Robinson warned analysts that 2023 could be much more challenging. With the possibility of a recession, Robinson said CN expects North American industrial production to be negative in the coming year. This will translate into lower shipment volumes of key products such as lumber, metals and minerals, and consumer products.
As can be seen in the following figure, this change, which took place between January 24 and 25, appears to be correlated with Mr. Robinson’s announcement, causing the major Canadian railroads, such as Canadian National Railway Co. (CNR), which lost nearly 5%, and Canadian Pacific Railway Ltd (CP), which lost nearly 4%, respectively the 1st and 3rd largest firms in the Canadian industrial sector.
Figure 5 :S&P/TSX Capped Industrials Index (TTIN)
Real estate
By Iness Dahlia Bouaou
In an effort to stabilize inflation, the central bank’s key interest rate was raised for the eighth consecutive time to 4.5% on January 25. The purpose of this increase is to put downward pressure on inflation in order to reach the control target set at 2%.
Figure 6: Comparison between the XRE and the S&P/TSX Composite Index
Thus, as shown in Figure 6 , comparing the XRE, the Canadian real estate stock market index, with the TSX, we see a fairly even performance. Indeed, since the increase in the policy rate was anticipated, the negative effects of the rate increase on the real estate sector were already taken into account by the stock market.
Since there are fewer buyers able to take out a loan, demand is falling while supply continues to rise, which is slowing the housing market. With the start of 2023, the Canadian Real Estate Association (CREA) expects home sales to decline by 0.5 per cent and prices to fall by 5.9 per cent compared to 2022.
Basic materials
By Soumia Saouli
In January 2023, the basic materials sector is doing well. In fact, as shown in the figure below, the XMA.TO Index (blue) rose by 5.98% and the S&P/TSX Index, which captures the total performance of the Toronto Stock Exchange, rose by 6.97%. This was due to a combination of factors, including:
First, there is strong demand for commodities. The continued growth of developing economies is driving demand for commodities, particularly in infrastructure projects. In fact, infrastructure spending around the world is another factor influencing the sector. Second, rising commodity prices are another issue affecting the sector’s performance. Commodity prices, such as copper and aluminum, are on the rise due to increased demand and supply chain disruptions. Also, monetary policies are favorable; low interest rates and loose monetary policies in many countries are stimulating investment in riskier assets, including the basic materials sector.
However, the sector also faces some challenges, including trade tensions between major economies that can impact raw material flows and disrupt the supply chain. In addition, environmental regulations can impact the cost of production for companies in the basic materials sector.
Overall, the commodities sector is doing well in January 2023, driven by strong demand for raw materials and rising commodity prices. Investors should keep an eye on trade tensions and environmental regulations, as these factors may impact the sector’s performance.
Figure 7: January performance of XMA.TO and S&P/TSX
Information Technology
By Mathias Malhotra
The 2023 year begins with a monstrous start from the Canadian technology sector. XIT in the month of January alone is up 14.32% as of January 29th outpacing the TSX by more than 7% and the Nasdaq by almost 3%.
Figure 8 : XIT and Shopify’s performance in the month of january compared to the TSX and NDX
Most investors are usually very satisfied with an 8% yearly return and XIT has come out with 14% in a single month, that is an incredible month!! The very high rise in XIT is mostly thanks to Shopify. Indeed, the index is very reliant on Shopify’s performance because 27.7% of XIT is composed of Shopify stock, which is its number one holding. In most cases if Shopify has a good month XIT will perform well.
In January, the beaten Shopify stock was up 36.6%. Part of that increase is due to the stock falling a lot faster than indexes, so when the market gets optimist, Shopify will gain momentum a lot faster. There is also the news that the company will raise its service plan fees after leaving them largely unchanged for the last 12 years. Investors saw that as a positive news because the company is confident that the change won’t negatively affect their current number of users but it will increase profitability.
Utilities
By Léo Lamy-Laliberté
The TSX Composite Index had a strong performance in January, jumping by 7.1%, marking its best monthly performance in over two years. Despite this positive start to the year, the utilities sector stayed mostly flat.
Figure 9 : TTUT compared to the TSX
One of the biggest concerns for the utilities sector was the reversal of tailwinds supporting earnings growth such as low inflation, low interest rates, and low energy prices. This, along with a weak macroeconomic environment, is pulling down the value of renewable energy projects.
The absence of a yield premium, as bond yields climbed to their highest level in 15 years, raises questions about the sector’s ability to offer earnings growth. The high inflation and rising interest rates pose a significant challenge and force reevaluation of growth plans, while higher costs will reduce cash flow and make infrastructure investments more expensive.
For instance, Algonquin Power (AQN.TO) is facing challenges with its $7.7 billion debt, 22% of which is subject to variable interest rates. Every 100-basis-point hike in interest rates results in a $16 million increase in annual interest expenses. In the nine months ended September 30, 2022, the company’s interest expenses increased by $38 million partly due to debt taken for the $609 million acquisition of Liberty NY Water, which cause the drop in its valuation seen in the month.
The utilities sector has yet to recover from its October drop and investors should keep a close eye on its progress as the year progresses.
Figure 10 : TTUT compared to the TSX
Energy
By Bastien Grimaud
Energy is a major part of Canada’s economy, and the sector has taken advantage of the year 2022 and its contingencies to experience strong growth in January 2023. Indeed, the S&P/TSX Capped Energy Index increased by 8.74% in January 2023, as shown in the following chart.
Figure 11 : Performance du S&P/TSX Capped Energy Index en janvier 2023 (TradingView)
However, the federal government announced an increase in the carbon tax. The tax was 50$ per ton of carbon dioxide equivalent and is expected to reach 65$ per ton later this year. The Canadian Energy sector is also subject to the will of the government to cap greenhouse gas emissions from the energy sector.
While this sector appears to be well performing this month, it remains a sector to watch closely as the carbon tax increase and new legislations leave room for uncertainty. In addition, the looming threat of a recession in 2023 makes companies reluctant to invest, as demand for oil is likely to fall.