Oil rally seen as boost for wider TSX
Industrials and financials poised to rise with higher oilpatch profits
Gold’s best run since 2010 pushed Canadian equities to the top spot among developed-market stocks this year. Fifty-dollar crude will give them an opportunity to stay there.
That’s the view of strategists who follow the resource-heavy stock market. They expect energy producers will rally into the end of the year as the most expensive crude in 15 months delivers a surge in earnings. The group will take over the baton from the S&P/TSX Materials Index that rallied as much as 65 per cent this year before fading in the third quarter.
A year after commodities producers dragged the S& P/ TSX Composite Index to its worst result since the financial crisis, companies that mine metals and produce oil and gas have fuelled a 14 per cent surge in the benchmark for Canadian equity that’s left it the best performer among 24 developed markets tracked by Bloomberg.
With crude trading above US$50 a barrel for the first time in 18 months, analysts see energy producers poised to deliver a five-fold profit increase in 2017 that will propel share gains.
“There’s still long-term quality names out there, especially in energy names that got thrown out with the bath water,” said Craig Fehr, Canada market strategist with Edward Jones in an interview from St. Louis. “It’s a reflection that $26 oil was too low. Energy stocks will benefit from the transition to a much easier year-over-year comparables period.”
Energy shares are poised to add to their 28 per cent surge as the price of crude emerges from an 18-month slump that took it to a 13-year low in February.
With crude holding near US$50 a barrel, prices are back to levels where oil producers around the world have said they can start investing again after billions of dollars of spending cuts and thousands of job losses over the past two years. U.S. shale field explorers are adding rigs, boosting oilfield work to the highest since February.
“The oil story going into 2017 looks pretty darn positive, and positive for the TSX,” said Philip Petursson, chief investment strategist for Manulife Investments. “Higher oil prices don’t just benefit oil producers, it also benefits industrials, financials.”
Commodities producers comprise one-third of Canada’s benchmark stock index, and the 32 best performers in the S&P/TSX this year through Thursday come from that contingent.
Teck Resources Ltd., the country’s largest diversified mining company, has surged more than five-fold in 2016 as its earnings have improved amid rising prices for commodities from metallurgical coal to zinc.
Meanwhile, Bonavista Energy Corp. is the top energy stock with a 161 per cent rally. The Calgarybased oil and natural gas producer has raised production projections this year and agreed in September to swap non-core properties in British Columbia for assets in the Deep Basin and west central Alberta core regions to concentrate its holdings.
Manulife’s Petursson says the run isn’t over for gold producers as the negative impact from any Fed rate hike will likely quickly reverse. Tightening would also imply an increase in inflation that would make the metal more appealing as a store of value. Gold futures have fallen 7.7 per cent since the August high to settle Oct. 20 at $1,267 an ounce in New York.
Fehr says investors who’ve missed the massive rallies in commodity producers this year can still benefit. “There was a lot of pain in these sectors in 2015 so we’ve seen in 2016 the pendulum swing back toward more economic optimism,” he said.
“While I don’t expect a repeat performance in 2017, mid-single digit return is reasonable.”