Canada versus the US

We have been so preoccupied by the return of the US markets that we have failed to notice how far behind our own TSX truly is. The Toronto Stock Exchange is not accompanied with the same level of optimism that is present in the United States; its current level is not much different than a few years ago, and it is 15 percent below its peak in 2008.

As US markets have been driven by the resurging strength of their private sector, led by their financial institutions, it’s been a diminishing demand for commodities that is largely seeing our market trade lower. And as lower commodity prices have been triggered by a waning global demand, our market has lost the link to that of the US.

As the above graph illustrates, in about September of 2011, two markets that exhibited a relatively higher level of correlation began to diverge. Since then, it was the US indices that have been supported by the initiation of the second round of quantitative easing and stronger corporate balance sheets. By falling vulnerable to the slump in global demand for commodities, it was our mining sector that was particularly impacted. Furthermore, as the junior mining sector struggles not only with the weaker demand, but also less than attractive precious metal prices, the continued outlook seems rather bleak.

Bloomberg put out a piece this week that discussed the slump in the price of the yellow metal and it makes it very clear why stock prices have been discounted with lower prices. In addition to the negative light on the mining sector, there have been record sales from the very ETF’s that allow investor to gather easy exposure to the price of gold. But to do with mining, large mining companies estimate the cost to take an ounce of gold out of the ground is 993 USD. What’s important about that number is that this is the cost for what would be a “blue-chip” company that likely mines both more efficiently and cost effectively. As the junior market struggles and prices hold at these lower levels, their margins will get slimmer and slimmer.

But it’s the respective returns of the two stock markets that exemplify the difference between our two respective economies. The Canadian economy, and more so the Canadian stock market, depend on the health of our natural resource sector. And it’s no surprise that a stall in global economic growth like we saw in the period between 2010 and 2012 has caused our indices to trade sideways and not present a positive outlook.

The challenge, though, is trying to determine what lies ahead. The United States sits with a monumental opportunity thanks to their abundance of oil and gas reserves. This is something that is not only favorable to the US consumer as they likely face lower energy prices, but this abundance of supply keeps downward pressure on global energy markets as well. As the US looks to be self-sufficient in terms of energy, which is a stark difference from a few years prior, Canada’s need to search for alternative trading partners increases. Keystone is important along with crude and gas production currently going to the US, but Canada’s opportunity for growth is elsewhere.