The Bigger Picture a Weekly Snapshot of the Markets Issue No

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The Bigger Picture A weekly snapshot of the markets Issue No. 305 June 22, 2015

Big reshuffle in ranks of biggest Canadian companies since June ‘08

Elvis Picardo, CFA In the previous commodity-fuelled bull market that imploded so spectacularly in 2008, the TSX Composite reached a record high of 15,154.77 on June 6 of that year. The index then plunged 50% in the next six months as the global credit crisis savaged equity markets worldwide, before commencing a long, multi-year climb that enabled it to surpass the 15,000 level six years later. While the TSX reached a new all-time high of 15,685.13 on September 3, 2014, it is presently about 900 points below that peak. Comparing the biggest companies by market capitalization in June 2008 with the biggest companies now generated some interesting insights. The TSX-60 was used to compare changes in market capitalization over this period.

1. As can be seen in Table 1, there has been a massive reshuffle in the ranks of the biggest Canadian companies. The three biggest Canadian companies as of June 2008 – Blackberry, EnCana, and Potash – have seen about 75% of their market value on average get vaporized since then. Five stocks have retained their Top Ten rank, which includes three banks – Royal Bank, TD Bank (currently 1 and 2 respectively), and Bank of Nova Scotia – plus Manulife, and Suncor. 2. While three of the companies that were among the 30 biggest on the TSX in June 2008 were subsequently acquired (Petro-Canada, Talisman and Nexen), as many as seven in the bottom half of the TSX-60 by size were also acquired (Fording, Shoppers Drug Mart, Tim Hortons, Inmet, Nova Chemicals, Uranium One, and Nordion). 3. The biggest positive change in market cap was achieved by Valeant Pharma, whose market cap rose almost 50-fold over this period to $95.7 billion as of June 19, 2015, vaulting it from last place in the TSX-60 in June 2008 to No.3 presently. Convenience store-operator Alimentation Couche-Tard, which currently ranks No. 19 on the TSX-60 with a market cap of $30 billion, increased market value more than 10-fold. Other companies that have at least doubled their market cap since June 2008 include Magna, the railroads (CP and CNR), Enbridge, Loblaws, Gildan, First Quantum, Canadian Tire, and Brookfield Asset Management. 4. On the negative side, the following companies suffered erosion in market capitalization of at least 60% since June 2008 – Blackberry, Penn West, Yellow Pages, EnCana, Kinross Gold, Enerplus, Teck Resources, Bombardier, Yamana Gold, and TransAlta.

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Bottom-Line: As is to be expected, the relentless bear market in commodities – and more recently, energy – has resulted in a significant reshuffle in the ranks of the biggest Canadian companies since June 2008. While as many as five commodity/energy giants were among Canada’s biggest companies six years ago, there is only one presently. The good news is that gains made by a diverse group of companies from sectors such as consumer discretionary and industrials have offset the declines suffered by commodity and energy producers to a large extent. On the other hand, the financial sector has increased its representation in the Top Ten to five, with the inclusion of Bank of Montreal (currently No.8). If one includes Brookfield (No.11 on the TSX-60 with a market cap of $43 billion), more than half of the very biggest Canadian companies (market cap > $40 billion) belong to the financial sector. Canadian banks may be among the most solid financial institutions globally, but as the events of 2008 elsewhere in the world proved, the dominance of the financial sector in an equity index can prove very problematic in the event of a major correction.

Table 1: Biggest TSX-60 companies by market cap. – June 6, 2008 vs. now Mkt.Cap. Rank Name Ticker Market Cap Market Cap Percentage Mkt.Cap. Rank 06-Jun-08 06/06/2008 ($bn)19/06/2015 ($bn) Change 19-Jun-15 1 BlackBerry Ltd BB $75.69 $5.78 -92.4% 54 2 Encana Corp ECA $70.77 $12.09 -82.9% 40 3 Potash Corp of Saskatchewan POT $68.99 $31.01 -55.1% 18 4 Royal Bank of Canada RY $65.30 $110.74 69.6% 1 5 Suncor Energy Inc SU $64.41 $48.70 -24.4% 7 6 Canadian Natural Resources CNQ $57.30 $37.75 -34.1% 13 7 Manulife Financial Corp MFC $57.27 $46.66 -18.5% 9 8 Toronto-Dominion Bank/The TD $55.51 $98.31 77.1% 2 9 Imperial Oil Ltd IMO $54.30 $39.68 -26.9% 12 10 Bank of Nova Scotia/The BNS $50.46 $77.87 54.3% 4 11 Husky Energy Inc HSE $43.76 $23.29 -46.8% 24 12 Barrick Gold Corp ABX $37.40 $16.40 -56.1% 30 13 Goldcorp Inc G $29.90 $16.75 -44.0% 29 14 Petro-Canada Acquired $28.52 N/A N/A N/A 15 BCE Inc BCE $28.02 $44.67 59.4% 10 16 Rogers Communications Inc RCI/B $26.81 $21.38 -20.3% 26 17 Canadian National Railway Co CNR $25.53 $60.52 137.1% 5 18 Sun Life Financial Inc SLF $25.23 $25.29 0.2% 22 19 Canadian Oil Sands Ltd COS $25.10 $4.55 -81.9% 56 20 CIBC CM $24.81 $36.99 49.1% 15 21 Talisman Energy Inc Acquired $24.28 N/A N/A N/A 22 Bank of Montreal BMO $23.99 $47.40 97.6% 8 23 Thomson Reuters Corp TRI $23.19 $37.62 62.2% 14 24 TransCanada Corp TRP $23.00 $36.72 59.7% 16 25 Teck Resources Ltd TCK/B $21.96 $7.72 -64.8% 50 26 Nexen Energy ULC Acquired $21.82 N/A N/A N/A 27 Brookfield Asset Management Inc BAM/A $21.14 $42.98 103.3% 11 28 Enbridge Inc ENB $16.90 $49.10 190.5% 6 29 Bombardier Inc BBD/B $15.28 $5.49 -64.1% 55 30 Agrium Inc AGU $14.87 $17.84 19.9% 27 Source: Bloomberg

Chart of the Day Fed’s “dot plot” shows lower trajectory of future rate hikes

Since Janet Yellen took over as chair of the Federal Reserve, investors have been paying much closer attention to the Fed’s “dot plot,” the schematic that shows FOMC official’s forecasts for the federal funds rate over the next three years. As can be seen in Fig.1 below, the median estimate for the fed funds rate at end-2016 is now at 1.625%, down from 1.875% in the Fed’s March forecast. For end-2017, the forecast is now at 2.875%, compared with 3.125% in March. The downward revision in forecasts is on account of lowered growth expectations, even as inflation remains nascent. Fed officials now expect the U.S. economy to expand by 1.8% to 2.0% this year, compared with their forecast for growth of 2.3% to 2.7% in March. Investors have been encouraged by this scenario of tentative growth, because it means that while the Fed will almost certainly hike the federal funds rate this year, future hikes may not follow the steep trajectory that has historically been the norm.

Fig. 1: Overview – FOMC participants’ assessment of appropriate monetary policy

Source: Federal Reserve

Market Snapshot At Close today S&P TSX 14790.48 +137.36 Commodities Yields (%) Can. US TSX Venture 682.34 -1.55 Canadian $ (US cents) 81.19 -0.33 90 Day T-Bill 0.57 0.00 DJIA 11819.78 +103.83 Gold (Spot)-US$ 1185.96 -14.31 2-Year Bond 0.62 0.66 S&P 500 2122.85 +12.86 Oil (WTI-Aug.) 60.26 +0.29 10-Yr.Bond 1.80 2.37 NASDAQ 5153.97 +36.97 CRB Index 223.23 +1.10 30-Yr. Bond 2.40 3.16

Thought for the Day “A diamond is a piece of coal that stuck to the job.” – Thomas Edison

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