As seasons change, so do fortunes of those playing the stock market
To everything there is a season. – Ecclesiastes
It’s true in life and it’s true in the stock market. There are times when some stocks thrive while others wither. Then the season changes. Those that have been dying on the vine burst with new buds, while the former winners are blighted.
We can see those patterns in the markets right now — just look at energy.
For the past few years, this has been a wasteland for investors as oil prices fell and capital spending dried up. In 2017, Canadian energy stocks as a group lost 12.6 per cent of their value. An investment of $10,000 made at the start of 2013 would have been worth only $7,700 at that point.
This year began in the same sour note. In the first quarter, the energy sector fell another 8.1 per cent as the price discount on Canadian crude widened to about $30 a barrel and the interprovincial battle over the Trans Mountain pipeline morphed into a national crisis.
But now spring has come to energy stocks. World stockpiles are shrinking. The discount on Canadian oil has been almost halved. The federal government is finally showing some resolve to get the Trans Mountain pipeline built.
And all this happened before this week’s decision by U.S. President Donald Trump to pull out of the Iran nuclear deal and reimpose “the highest level of economic sanctions.”
That will bite deeply into global supply. According to the Iranian Oil Ministry, the country averaged 2.617 million barrels per day in oil exports in April. We don’t know at this point how deeply the sanctions will cut into that, but Trump’s threat to punish anyone that defies his edict will give pause to European countries, which take about 40 per cent of Iran’s oil exports.
Not surprisingly, Canadian oil stocks have been moving high- er in the face of these developments. Shares of Suncor, the country’s largest oil company by revenue, are trading near their five-year high. Imperial Oil has seen its price jump from below $34 in April to over $40 now. Cenovus Energy, which is heavily focused on the oil sands, has seen its share price increase by almost 50 per cent since March.
Year-to-date, energy stocks are only up 3.3 per cent. But that doesn’t tell the true story of what’s happening. Their season has come round again and this sector is blooming.
Some analysts are now suggesting that oil could reach $100 (U.S.) a barrel by yearend. The Iran situation and increasing concern about supply from Libya (North Africa’s largest producer) are likely to keep putting upward pressure on prices, and energy stocks will be the beneficiaries.
But while the energy sector is prospering again, it’s a different story for utilities. As of the close of trading on May 7, Canadian utility stocks were down 8 per cent for 2018. For the past few years, they have been market darlings as a growing demand for yield during a time of historically low interest rates drove their prices ever higher.
Canadian Utilities is an example. It’s an Alberta-based company that, among other things, delivers electricity and natural gas to more than two million customers.
Last August, you would have paid as much as $42.44 to buy one share. That would have earned you a dividend of $1.43 per year, for a yield of 3.37 per cent. When five-year GICs from the major banks are paying 1.6 per cent or less, that kind of return seem very attractive.
Flash forward to today. The company raised its dividend by 10 per cent in February to $0.3933 per month (about $1.57 per year). But you can now buy the stock for about $33, for an annual return of 4.77 per cent.
It’s the same story across the whole sector. Utilities as a group are down 8 per cent so far this year, compared to a loss of only 2.5 per cent for the TSX as a whole.
What has changed? Mainly, interest rates. The Bank of Canada has been sitting on its hands, worried about such unknowns as the outcome of the NAFTA talks. But commercial rates are rising quickly, especially in the mortgage sector. The yield on 10-year U.S. Treasury bonds is hovering around the 3-per-cent level, the highest in years, and the U.S. Federal Reserve Board will probably pull the trigger on another quarter-point hike at its next meeting in mid-June.
Higher rates hurt interestsensitive stocks such as utilities. A yield of 3.37 per cent doesn’t look anywhere near as appealing when you can get about 3 per cent from a safe U.S. government bond. Investors want a better pay-off for the risk of buying stocks, so the share price drops.
Both these seasons will eventually end, as they always do. But for energy at least, we appear to be at the beginning of the cycle. If you don’t have any of these stocks in your portfolio, it’s time to take a fresh look at the sector.