The stock market balance sheet after six months in 2024 remains variegated, with a still pronounced decoupling between the performance of the Canadian and American benchmark indices. However, isn’t the oil sector still in good shape in Canada?
The S&P/TSX index of the Toronto Stock Exchange recorded an increase of some 4% after six months, compared to 15% for the S&P 500. The gap is therefore widening in this game of comparisons, after a performance 2.5 times higher of the American benchmark index last year.
Certainly, the first explanation comes from the respective component of the indices. In terms of their weight, technology stocks dominate the top 20 positions of the American index, where only one financial institution and two oil giants are present. In Canada, as of June 25, financial institutions and major oil companies shared some 70% of these top 20 positions according to market capitalization. There is only one so-called technological company, from the software field.
This year, the energy and mining and metals sectors are among the strongest performers, but the performance of technology stocks – with the presence of what analysts call the “magnificent seven” – is even more vigorous, driven by the exponential rise of artificial intelligence.
Techno decoupling
In a study published on 1er Last March, Robert Kavcic, Senior Economist and Director of Economics at BMO Capital Markets, summed it up well: “The old truth is that Canadian stock indices often just don’t have a lot of exposure to what works, and that couldn’t be more true today.”
He points to the three-times-higher weighting in the U.S. index of the technology, communication services and consumer discretionary sectors, which have been major catalysts for performance once the impact of rising interest rates is factored in. An analysis by Royal Bank notes that Nvidia, the current big star in AI, accounts for 33% of the S&P 500’s gain after six months. Also, six of the other seven stocks claiming 38% of the index’s gain come from the AI space.
This has been exacerbated by a loss of interest from foreign investors. “According to the most recent data, foreign investors have offloaded $37 billion of Canadian stocks over the past 12 months, a trend that has been in place since the beginning of 2023,” National Bank economists noted in their June stock market overview.
An oil sector yet in great shape
This disavowal is not without masking an oil activity that is in great shape in Canada, and this, in the midst of the climate crisis. Tom Green, senior climate policy advisor at the David Suzuki Foundation, illustrated this well. “High prices and profits in the oil and gas sector have been the main factors behind the recent high inflation in Canada and around the world. Even with lower gasoline prices, oil profits in 2023 were still $30 billion higher than the last year before the pandemic,” read an email.
And it’s not over. Marc Ercolao, economist at TD Bank, forecasts growth in oil production of around 6 to 10% in 2024. The economist takes up the target of the Canadian Association of Petroleum Producers predicting an increase in capital spending in upstream of just over 4% this year, after growth of 10% in 2023. And that of Statistics Canada’s survey on investment intentions, which estimates that the oil and gas industry as a whole will increase its capital spending by 8.2% this year, following 12% growth last year, with most of it going to expanding operations and production.
But overall, on a cyclical level, this decoupling reflects an underperformance of the Canadian economy, with real GDP growth of 1% over the past year, compared to about 3.2% south of the border. Worse, the Canadian economy is evolving into a recession on the basis of its GDP per capita. “Canada’s population growth was stronger by more than 2.5 percentage points, leaving the gap in per capita growth at an even wider and historical level of 4.8 percentage points,” calculates the BMO economist. Adding to the explanation is a Canadian economy more sensitive to interest rates, with high household debt and real growth in consumer spending 1.5 points lower than that of the United States.
More importantly, “Canada is completely missing out on the recovery in productivity growth south of the border.”
Bitcoin in high flight
Oh yes. Another fact worthy of mention in this mid-year overview, bitcoin crossed the US$72,000 mark after ending 2023 around US$42,000, a jump of more than 70%.
There are two major explanations for this speculative surge. First, the regulatory approval in the United States by the Securities and Exchange Commission in January of a bitcoin fund traded on the stock exchange. Analysts saw this as both a rapprochement of the digital asset universe into a regulated fold and a greater democratization of cryptocurrency through the accessibility offered to the average investor.
Then, 2024 is a year of “ halving “, or a halving of the reward tied to the bitcoin mining threshold. An event that occurs roughly every four years and aims to limit the total number of bitcoins in circulation, or even increase their scarcity, in order to maintain or increase their value. Historical data shows a trend of explosive growth in bitcoin prices after each halving event, according to a report from specialist analysis firm CoinGecko.
All this is pure speculation!