As the shock waves from Russia’s attack on Ukraine rippled through global financial markets on Thursday, Canadian stocks were distinctly resilient.
While there was plenty of volatility on the Toronto Stock Exchange, especially in the financials sector, the losses were more than offset by relative strength in energy and tech stocks.
The trading day ended with the S&P/TSX Composite Index eking out a gain of 0.1 per cent, compared with the 4-per-cent loss posted by French, German and British benchmark indexes.
It resembles a pattern that has materialized over this year’s first two months of trading – while every major market is down, Canada is the least scathed among them.
One could argue that the crisis in Europe actually reinforces the trends that favour the Canadian market, such as consumer price inflation, rising commodity prices and a preference for undervalued stocks over high-flying growth names.
“There is certainly a shift under way. You can see it within sectors, and you can see it across different countries’ equity markets,” said Brian Madden, chief investment officer at First Avenue Investment Counsel. “Canada is a relative value play, especially when it comes to the North American market.”
It’s a very different playbook than that which investors have grown accustomed to over the past several years. Runaway inflation has forced central bankers to begin reversing the flow of stimulus, which provided a powerful ballast to stock prices even in the face of a global public health disaster.
And with that, Big Tech was out, and resources were in.
Steep declines in U.S. tech stocks have dragged the S&P 500 index down by 11 per cent, and the Nasdaq Composite Index down by 15 per cent, just since the start of the year.
Curiously, the Nasdaq staged a dramatic comeback on Thursday, with heavy losses at the opening bell vanishing through the day, as the index closed with a gain of 3.3 per cent. The rally gained momentum toward the close of trading, with all U.S. and Canadian benchmarks ending up in positive territory.
That reversal may have been driven by hopes that central bankers ease back on plans to tighten policy in light of Russia’s assault.
“My sense is that the rate-hike cycle won’t be as severe as it was expected to be a few days ago,” said Michael Craig, head of asset allocation and derivatives at TD Asset Management.
Central bankers still face a monumental inflation problem, however, which is only likely to get worse as a result of war in Eastern Europe. “We now have a clash of two storms,” Mr. Craig said.
Additional inflationary pressures are most evident in commodity markets, as global crude oil benchmarks briefly rose past the US$100-a-barrel mark for the first time since 2014, before settling back down into the mid-US$90s. Gold prices, meanwhile, shot to their highest level in nine months, before they, too, changed course and gave up their gains on Thursday afternoon.
Not surprisingly, the energy and mining sectors have led the gains on the TSX so far this year. The top 15 performing stocks in the S&P/TSX Composite Index, in fact, are entirely made up of oil and gas companies and gold miners.
Large resource sector weightings have mitigated the losses for the TSX, while other major markets have sold off forcefully. Year to date, the Composite has dipped by just 2.2 per cent.
Higher commodity prices are not universally positive across the Canadian stock market, however. Industrials and consumer sectors could suffer as more spending gets directed to energy costs, Ian Riach, a portfolio manager at Franklin Templeton Investment Solutions, said in an e-mail.
And if interest rates don’t rise to the extent expected until very recently, that’s not good for bank profits. On Thursday, the iShares S&P/TSX Capped Financials Index ETF fell by 1.4 per cent.
“We are still overweight Canada as we do think cyclical growth will resume once there is more clarity on the geopolitical scene,” Mr. Riach said. “But that could take a while.”
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