Oil stock fallout felt deeply in Canada
Plummeting oil prices are taking a toll on earnings expectations around the world and nowhere is the steep downturn in profit estimates more noticeable than in Canada, says a new report from Citigroup Capital Markets.
But resource stocks aside, analysts continue to predict steady growth for corporate profits in this country this year.
“Global EPS forecasts are under pressure,” said Robert Buckland, Citigroup’s chief global equity strategist in a note to clients. “Most of the downgrades can be attributed to commodity stocks.”
In particular, the average analyst estimate for 2015 profit growth overall has fallen to 5% from 12% in September 2014.
Bottom-line expectations have fallen close to 20% in Canada during this period, more than any of the 20 other countries researched in the report.
Earnings per share estimates in South Africa, Switzerland, the United Kingdom, Italy and Brazil have also declined by more than 10%, while Taiwan and Japan are the only two countries with upward EPS revisions.
Mr. Buckland said there are two themes impacting country-specific earnings expectations.
Not surprisingly, countries such as Canada, Brazil and the U.K. have suffered larger downgrades than the likes of Taiwan, Japan, the Netherlands and Turkey because of the former group’s heavier weighting of resource stocks.
At the same time, Japan’s positive earnings revisions reflect the country’s weaker yen, while the hit in Switzerland’s EPS is due to the Swiss franc’s recent strength.
“Energy has seen a 46% reduction in 2015 forecasts since last September. Materials forecasts have been cut by 14%,” the strategist said. “Elsewhere, the changes have been less dramatic, although the general direction of forecasts has been downwards.”
Mr. Buckland said global earnings forecasts have only dropped by 2% when excluding energy and materials stocks, which combined make up 17% of global earnings.
Furthermore, he noted that non-commodity stocks in resource-heavy countries such as Canada and Australia have actually had their earnings outlooks upgraded since September.
“They have benefited from lower commodity prices [through a weaker currency] without suffering so directly from the negative impact, although that may come in time if their economies weaken,” he said. “This is a good time to be a non-commodity stock in a commodity-driven stock market.”
Recent performance on the S&P/TSX composite index bears that observation out. Canadian energy stocks are down 20.5% since the beginning of September and materials are off 7%, but seven of the other sectors are trading higher, including health care, the best-performing sector, which is up 49%.
A recent study sponsored by Schwaben Capital Group Ltd. showed non-resourcerelated stocks in Canada have continuously performed better than resource-related equities on a risk-adjusted basis over the past 25 years, with the exception of the commodity boom between 2000 and 2008.
As a result, the Torontobased investment manager does not invest in companies whose major business activities are rooted in the natural resources field, arguing that the long-run performance of such stocks does not adequately compensate for the volatility involved.