ECONOMIC TAILSPIN
Profits won’t recover yet
With earnings season about to begin, fund managers do not expect to see a recovery in profits for Canadian companies as they continue to struggle with a deteriorating loonie, depressed oil prices and anemic growth.
Companies will begin reporting fourth-quarter earnings next week amid a bear market for stocks. The S&P/TSX Composite Index is down 22 per cent since last April, more than surpassing the 20 per cent threshold to be considered bearish. The index added to its losses Friday, as the TSX dropped 2.13 per cent, or 262.57 points, to 12,073.46.
Much of the downward trajectory of the TSX has been driven by the drop in oil prices and the general weakness of the economy. But while gross domestic product has recovered from a technical recession seen in the first half of last year, depressed earnings are unlikely to bounce back this year, say fund managers.
“Earnings are going to be awful on an accumulative basis,” said Barry Schwartz, chief investment officer, Baskin Wealth Management.
“The earnings recovery in the Canadian economy is going to be delayed another year.”
The biggest drag on earnings, not surprisingly, is in the resource sector, particularly energy companies. Those companies are expected to continue to struggle this year as they desperately cut costs to try to maintain profits in an unprofitable oil environment.
Companies that make a significant chunk of profit in U.S. dollars, however, are expected to be the one bright spot for earnings this year. Last year, firms with large American sales and presence such as Toronto-Dominion Bank, Open-Text Corp. and CAE Inc. saw a lift to their earnings as the value of U.S. sales increased.
“Currency is going to be the big thing, once again,” said Craig Basinger, chief investment officer, Richardson GMP. “Canadian companies with big U.S. operations reporting Canadian dollars are probably going to look better in this environment.”
The loonie has lost 17 per cent of its value against the U.S. dollar in the past year alone, with some analysts forecasting there could be further downside before it recovers.
The currency slipped 0.81 cents Friday 68.82 cents against the greenback.
National Bank Financial economists noted in December that the earnings of non-resource companies during the third quarter clearly benefited from the lower loonie. On average, the non-resource segment of the TSX saw earnings grow by three per cent in Q3, while resource companies recorded a contraction.
But even those companies may not be immune from oil’s fallout. The Bank of Canada’s Business Outlook Survey showed this week that investment and hiring intentions have plunged to their lowest level since the 2009 recession.
“Overall, responses to the winter Business Outlook Survey indicate that business sentiment has deteriorated as the negative effects of the commodity price shock continue to unfold and spread beyond the resource sector,” the bank said.
The risk of earnings contagion from the energy sector will leave a dark cloud hovering over the first part of 2016. Schwartz of Baskin said it is likely earnings could contract further this year, though any further decline could set up a stronger bounce in 2017 if oil prices do recover.
“In one more year we could be coming off a much lower base, giving more room for some meaningful growth,” said Schwartz. “But in the meantime, we predict any earnings recovery in Canada is delayed.”