Team PolyFinances

Monthly Review - October 2021

Consumer staple

By Catherine Kallas

The consumer staples sector is made up of companies that specialize in products that are essential for everyday life. This encompasses household goods, food, hygiene products and much more. It goes without saying that consumers cannot eliminate these products from their daily expenses, even in times of economic crisis. This allows these companies to maintain constant growth regardless of the economic situation. This sector is dominated by an oligopoly made up of companies such as Kraft Heinz and Proctor & Gamble.

The exchange traded fund covering this sector is known under the ticker XLP. The following figure shows their development during the month of October in comparison with the S&P500 index (GSPC) which is based on the 500 largest companies in the United States.

Figure 1 : Evolution of XLP ETF compared to the S&P500 index for the month of October 2021 (Yahoo Finance, 2021)

We can see that the XLP outperformed the GSPC index until the middle of October. From the middle of the month, a transition can be observed and the XLP underperforms the index in question. This fund is also experiencing growth which, according to financial analysts, is due to inflation in this sector and the difficulties encountered in supply chains due to the current pandemic. Tracking the XLP Index over the next few months will predict when inflation pressures eases. These have been the cause of a significant drop in investments in this sector. Indeed, according to an analysis by Yahoo Finance, this sector’s market share among the S & P500s has fallen to less than 6% for the first time in 30 years (Sozzi, 2021).

 

Energy

The Price of Petrol Trending Upward, by Louis-Frédéric Bélanger

The price of crude oil continues its uptrend with the West Texas Intermediate (WTI), a type of oil used as a standard for the price per barrel, reaching $82.10 per barrel, an increase of 9.5% for the month of October. The S&P/TSX Capped Energy Index (TTEN), strongly driven by the price of oil, also rose by about 9.5%, which is twice as much as the S&P/TSX Composite Index did. In fact, oil still represents a third of world energy production, compared to only 15% for clean energies. As shown by the following figure, oil consumption is still higher than the global production, pushing WTI higher.

Figure 2 : Comparison of global crude oil supply and demand (eia, 2021)

This gap is mainly due to a faster than expected economic recovery from the pandemic, as well as numerous supply chain issues. In addition, the Organization of the Petroleum Exporting Countries (OPEC) announced on October 4 that it was upholding its decision to increase oil production by 400,000 barrels per day, implying that the levels of consumption and production are only forecasted to meet in April 2022. As a result of this announcement, WTI rose nearly 3% in a matter of hours. Finally, despite global efforts for a transition to clean energy, we note that oil is still the most important source of energy, with daily consumption nearing 100 million barrels (15.9 billion litres per day).

 

Finance

Bitcoin’s rise, by Manal Mouhajir

Bitcoin, created in 2008 by Satoshi Nakamoto, just passed the $66,000 mark on Wednesday, October 20th, 2021, a record for the world’s most famous cryptocurrency. Born after the financial crisis in 2008, Bitcoin was trading for just a few dollars some years ago. This new surge for Bitcoin stems from the entry of the first-ever Bitcoin-related exchange traded fund (ETF) authorized by the Securities Exchange Commission (SEC) on the New York Stock Exchange a few days earlier. Since 2013, the SEC had successively refused all such applications because of the risk of attempts to manipulate Bitcoin in the market. This announcement allowed the virtual currency to explode, breaking its previous valuation record. In just one day, more than $1 billion in volume was recorded, equivalent to over 29 million shares. Bitcoin has had quite an eventful year. Since October 2020, it was worth no more than $15,000, resulting in a 300% increase! It then increased at the beginning of 2021 from less than $30,000 in January to over $60,000 in just a few months. However, with its high volatility, even for experts, it becomes difficult to predict its trend. Some believe it could cross the $100,000 mark in the next few years, while others predict a drastic drop due to the sheep effect on investors, if people start selling.

 

Fintech

Aren’t cryptocurrencies supposed to be a scam?, by Hugo Lirette

The following figure compares the performance of the S&P Cryptocurrency Broad Digital Market Index, an indicator that tracks the performance of digital assets listed on recognized open digital exchanges that meet minimum liquidity and market capitalization criteria, to the performance of the S&P500 for the month of October 2021. It is interesting to note that the cryptocurrency market is about to close the month of October with a return of 35.59%, which is 29.58% higher than the return offered by the S&P500.

Figure 3 : Comparison between the performance of the S&P Cryptocurrency Broad Digital Market Index and the performance of the S&P500

Several big news for the cryptocurrency market this month. First, Bitcoin broke its record price again and passed the $82,000 CAD mark. Another interesting piece of news, in the 3rd Annual Crypto Hedge Funds Report 2021 produced by the firm PwC: “Around a fifth of hedge funds are investing in digital assets (21%); the average percentage of their total hedge fund Assets under management (AuM) invested in digital assets is 3%. More than 85% of those hedge funds intend to deploy more capital into the asset class by the end of 2021.” This is very bullish news for digital assets. Finally, a new Bitcoin Futures ETF has just been introduced to the market. As a reminder, according to Investopedia, futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price, and an exchange traded fund (ETF) is a type of security that tracks an index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the same way a regular stock can. This is another step forward for the adoption of cryptocurrencies. 

 

Evergrande and the Chinese real estate market

By Marie-Pier Dufour

Evergrande is one of the biggest developers in China. The company has 1,300 projects in over 280 cities around the country. It invests in tourism, digitalis, insurances, health and in electrical cars. Evergrande also owns a football club. All its activities and the drop of the apartment market price led the developer to a 303 Us billions of loans. Evergrande is not the only company in this situation. A dozen developers are on a pilot program to decrease their debt. Regulators also impose “three red lines” to avoid borrowing. First, Liabilities (ex advanced proceeds) to Total Assets ratio need to be less than 70%. Second, the Net Debt to Equity must be 100%. And finally, the Cash for Short-Term Debt must be at least one. If all of these limits are reached, the developer will not be able to increase his debt the next year. Moreover, the stock for this sector has been suspended from October 4 until October 21 to help the companies. The objective of theses limitations is to avoid events like the 1990 crisis in Japan.

This graph supports the says that there is a problem in this sector. Indeed, it is possible to note the China Property Shares Index who follows the biggest developers in China have dropped 18.82%, compared to a 5.5% drop for the Blue-Chip. The Blue-Chip replicate the performance of 300 huge company stock. This index also represents a trend of the market. Therefore, the real estate companies perform less than the other sectors. Yet, real estate and construction are supposed to be a sector contributing to the country grows.

Figure 4 : China property shares index vs blue-chip index YTD

 

Industries

CN Rail stock rises after financial results, by Lynn Doughane

Canadian National Railway Company stock has been and continues to be a hot spot for investors. After a difficult period due to the pandemic, CN Rail is reporting strong results and as a result CN Rail’s share price is at historic highs. The company has even reinstated its share buyback program to return cash to shareholders.

Figure 5 : CN Rail share price graph

Following the announcement of their new strategic plan, we can see the impact of this plan as well as the business model implemented by the Montreal-based railway on the third quarter results.

In support of this, third-quarter revenues increased by 5%, despite a 1% decline in volumes. However, the operating ratio, which measures the efficiency of a company’s management by comparing a company’s total operating expenses (OPEX) to net sales, increased. Normalizing the ratio, it stands at 59%, which highlights a phenomenal result.  Finally, we can mention the company’s performance in terms of its cash flow generated, which was just over $2 billion.

 

Basic materials

By Uriel Manseau-Pérez

October was a good month for the basic materials industry. Indeed, the iShares S & P / TSX Capped Materials Index ETF outperformed the S & P / TSX Composite Index, which represents the Canadian market overall. The XMA.TO commodities-focused ETF rose 5.83% this month while the S & P / TSX index was content to rise 4.40%. So here is a graph to illustrate the situation.

Figure 6 : October performance: XMA.TO and S&P/ TSX

The Bank of Canada revealed in October a 5% growth projection for the Canadian economy in 2021 and that the Canadian economy will remain robust. Faced with these projections, the outperformance of the basic materials sector was an expected result as the sector is very sensitive to the ups and downs of the economy. Also, the Bank expects robust foreign demand and high commodity prices to support strong export growth.

Another factor that should support economic growth is the high level of savings accumulated by Canadian households. Here is a graph that brings together several statistics related to the level of savings and consumption of Canadian households.

Figure 7 : Projection of the level of household consumption

With the average savings rate considerably higher than before the pandemic, it is normal to observe an upward projection of the level of household consumption until 2023 (red line). The basic materials sector, being often seen as an input to the economy, is therefore in a very enviable situation, at least for the next 2 years.

 

Health Care

By Christophe Thibodeau

The Canadian health care index – S&P/TSX Capped Health Care Index (^TTHC) – continues his downtrend in October. In fact, the cannabis sector pulls down the index because it is composed of 56% cannabis stocks. Besides, TTHC has decreased by 50% of his February top, which happened because of Joe Biden’s desire for decriminalization of cannabis.

Figure 8 : S&P/TSX Capped Health Care Index

However, it should be noted that the volume fell off since the start of 2021. This could be a sign of a potential reversal in the next months.

 

Information Technology

By Guillaume Thibault

In the last month, the XLK, the technology sector index, has seen an increase of 6.39%. Compared to the S&P500, with an increase of 5.29%, the technology sector has been a little better performing. This index is composed of 21.45% and 20.37% of Apple and Microsoft shares respectively, and these two companies had returns of 7.53% and 14.20%.

Apple’s increase can easily be explained by the announcement of new products for the professional world with their A1 pro and A1 pro max chips that can deliver a much higher power by energy consumption ratio than the competition. Moreover, these products having a new design could lead many to change their laptop for the new generation during the holiday season and then help Apple’s sales.

Microsoft’s increase comes from the fact that the company surpassed analysts’ expectations in its first fiscal quarter release thanks to strong activity in its cloud computing business with revenues of $20.7 billion, which is equivalent to a 36% year-over-year increase. In addition, Microsoft expects revenue of $50.6 billion for the December quarter.

 

Utilities

By Félix Glorieux

Let us remember that the utilities sector is made up of companies that provide electricity, natural gas, water and other services to homes and businesses. These are, as a rule, highly regulated companies that have underperformed the global market for the past year. Indeed, we can compare the returns of around 3.96% of the Vanguard Utilities Fund ETF (VPU) to the 30% growth that the TSX has experienced over the past year. Additionally, across the 11 sectors of the S & P500, the Utilities sector is second to last in performance, growing 7.22% over a one-year period, as of October 26, 2021. The main reasons for this activity stem from the rise in bond yields and the significant concentration of investors in high-growth technology stocks linked to the economic recovery.

Figure 9 : ^GSPTSE/VPU Utilities Index

These figures are also reflected in the last month when the utilities sector grew by 2.3% compared to the 3.8% growth of the overall market.

Utility stocks are certainly subject to interest rate risk and can be significantly affected by changes in interest rates. Utilities can be negatively affected by rising interest rates in two ways:

  1. A rise in interest rates makes bonds more attractive to conservative investors – the very type that is typically drawn to utility stocks.
  2. An increase in the cost of borrowing: this is a particularly important factor for utility companies due to their generally high level of debt. Building power plants and maintaining the vast infrastructure required to supply gas, water or electricity make utilities a very expensive sector that requires significant debt financing.

 

References 

Yahoo Finance. (2021). Consumer Staples Select Sector SPDR Fund (XLP). https://ca.finance.yahoo.com

Sozzi B. (2021). The stocks have been forgotten research note. Yahoo Finance. https://finance.yahoo.com/news/these-stocks-have-been-forgotten-research-note-175934167.html

U.S. Energy Information Administration (Octobre 2021). Short-Term Energy Outlook. https://www.eia.gov/outlooks/steo/report/global_oil.php

Hajric, V and Ossinger, J. (20 October 2021). Bitcoin surges to all-time high in crypto’s ‘validating moment’. Bloomberg. https://www.bnnbloomberg.ca/bitcoin-surges-to-all-time-high-in-crypto-s-validating-moment-1.1669022

Turcan, M. (20 October 2021). Record broken: bitcoin has never been worth so much. Numerama. https://www.numerama.com/tech/749136-le-bitcoin-vient-de-battre-son-record-il-na-jamais-valu-autant.html

Montreal Gazette Editorial Board. (6 octobre 2017). Editorial: The end of Energy East. The Montreal Gazette. http://montrealgazette.com/opinion/editorials/editorial-the-end-of-energy-east

Galbraith.A. (14 octobre 2021). China real estate shares, bonds hit by Evergrande concerns. Reuters. China real estate shares, bonds hit by Evergrande concerns | Reuters

Zone bourse. (20 octobre 2021) . China Evergrande annonce la fin de la vente de sa participation dans Property Services. China Evergrande annonce la fin de la vente de sa participation dans Property Services | Zone bourse

Nouvelles du monde. (9 octobre 2021). Ce que signifient les trois lignes rouges de la Chine pour les sociétés immobilières. Ce que signifient les trois lignes rouges de la Chine pour les sociétés immobilières – Nouvelles Du Monde (nouvelles-du-monde.com)

M.marketscreener.com. 2021. Canadian National Railway : On track to achieve Strategic Plan 2022 targets with operating performance improvements and cost initiatives well underway – Form 6-K | MarketScreener. https://m.marketscreener.com/quote/stock/CANADIAN-NATIONAL-RAILWAY-1409526/news/Canadian-National-Railway-On-track-to-achieve-Strategic-Plan-2022-targets-with-operating-performan-36722414

Marotta, S., 2021. CN Rail announces new strategic plan to fend off activist investor | Financial Post. [online] Financialpost.com. https://financialpost.com/transportation/rail/cn-rail-announces-new-strategic-plan-to-fend-off-activist-investor