Canada’s S&P/TSX index (+12%) outperformed most regions outside the U.S. in April after underperforming globally in Q1 as COVID broke out. We caution against the move as much of the drivers are short-lived in nature. For one, energy and consumer discretionary stocks drove the S&P/TSX rally as investors flocked to the most battered sectors. We remain bearish on both in our mid-term outlook (6-12 month), but recognize that energy stocks may continue to find near-term support as oil prices normalize on demand resumption pushing the market into deficit later this year (Source: CNBC).
We see some important and persistent factors why investors could remain cautious on the energy complex. First, depressed oil prices are underpriced as oil companies are still discounting prices above $40pb. Second, renewables and Environmental, Social & Corporate Governance (ESG) awareness will probably accelerate in a post-COVID world. Intercontinental travelling and working from home, for instance, are significant drivers of oil demand, and we expect them slowly return to pre-COVID levels. Finally, keep in mind that the energy sector, BMO Equal Weight Oil & Gas Index ETF (ticker: ZEO, +16.7%)* lagged the broad market BMO S&P/TSX Capped Composite Index ETF (ticker: ZCN, +22.8%)** in 2019 despite WTI oil prices surging 34% in 2019.
We also expect financials, the largest sector in the S&P/TSX, accounting for 28.5% of the index, to lag this year. Flat yield curves and near zero interest rates reflect the slower economic growth and credit demand. Lastly, we highlight that Canada’s Information and Technology sector has crushed other sectors due entirely to Shopify, whose stock price has doubled in 2020 (Chart 2).