The end of the year is approaching, and it’s not the few rare bullish flares that the major stock indexes have seen on occasion that suggest a possible final rally. In this year of high inflation, marked by well-judged and repeated interventions by the monetary authorities, investors are no longer under any illusions and rather coolly assess the losses they will have to discount on their balance sheets at the end of the year.
Posted yesterday at 6:30 am
The behavior of stock markets in 2022 is well on its way to confirming its function as a leading indicator of economic activity, as more and more economists now expect a very high probability of a recession beginning in early 2023.
It remains to be seen how strong the next economic downturn will be and how long it will last. The next months will confirm everything.
However, Canadian investors can take some solace in the fact that the decline seen in the Canadian stock market since last spring has been less pronounced than the decline seen in the US stock market and other major markets in the rest of the world.
The Toronto Stock Exchange’s S&P/TSX is down 11.1% year-to-date, compared with a 23.9% drop for the U.S. S&P 500 and a 14.9% drop for the MSCI EAFE index, which tracks stock market returns in Europe, Oceania and in the Far East.
If the Canadian stock market has so far managed to show less decline than other major indices, it is mainly because of its strong exposure to stocks in the fossil fuel sector.
And that is also why the S&P/TSX index presents a more favorable balance sheet at the end of October 2022 than the one generated by Quebec securities so far, as calculated by the Morningstar Quebec Bank index. National ( MQBN ), which posted a negative balance of 12.9% YTD.
Over the past 10 years, the MQBN index, which is composed of 60 securities of publicly traded Quebec companies – out of a potential universe of 105 Quebec securities – has generally, but not absolutely, outperformed the TSX. The Canadian index generated an annualized return of 10.4% compared to 7.9% for the S&P/TSX.
The unpredictability of fossil titles
In the past, the comparable performance of Quebec securities compared to Canadian securities was often favored by their lack of exposure to the fossil energy sector – oil and natural gas – which is not the case this year.
Pierre Lussier, vice-president and senior manager of the Quebec equity division of Eterna Investment Management, created with his colleague Philippe Côté the Quebec-Eterna Composite portfolio, which includes 34 securities of Quebec companies.
“To date, we’ve managed to generate a return comparable to the S&P/TSX in 2022 without having any fossil securities in our portfolio, even though they make up almost 20% of the TSE and have returned 19.6% this year,” he explains manager.
You never invest in a security without having predictable profits. However, with fossil securities, we never have an accurate idea of future profits, it is pure speculation.
Pierre Lussier, vice president and senior manager of the Quebec equity division of Eterna Investment Management
However, the behavior of Quebec securities is not linear, as evidenced by the returns generated by the 10 largest securities in the Morningstar Quebec National Bank Index.
While Dollarama’s stock posted a spectacular 47% return on September 30, Couche-Tard’s 12.84% and Metro’s 16.12%, declines were far more numerous: CGI -2.59%, CN -0.28%, National Bank -9, 45%, TFI International at -5.8% and finally Power Corporation at -17.24%.
A bear market is never a good time for an investor. We don’t know when setbacks will lead to a trend reversal, but we agree that improving economic conditions are a necessary condition for markets to resume a sustainable upward trajectory.
If there’s any reason for consolation, it’s when we stop at the price-earnings ratios of stocks, which have seen a sharp decline since the beginning of the year.
In the list of the top 10 security positions that make up the MQBN index, we see that National Bank Securities trades at a price-to-earnings ratio of 9.27, Power Corporation shares at 7.91, and TFI shares. International, 12:36 p.m. Today’s disappointment could become tomorrow’s opportunity, even if we don’t know exactly when that tomorrow will come.