Oh Canada…One Of The Pain Trades Of 2015 by Eric Bush, CFA, Gavekal Capital Blog
Canadian equities are washed out but unfortunately the rout doesn’t look like its completely over. The GKCI Canada Index is made up of 120 companies, 59 of which are either energy (25), materials (19) or industrial (15) companies. The largest sector, by number of companies, is actual the financial sector (26). The median Canadian energy company is down a whopping 38.6% YTD in USD. The median Canadian materials company is right behind as it is down over 35% YTD. Overall, five out of the 10 sectors are are in bear market YTD.
Currently, only about 11% of Canadian equities are trading above its 200-day moving average. This is the lowest percentage of any developed market country. The GKCI Canada Index has now spent more time in oversold territory (i.e. fewer than 20% of stocks trading above 200-day moving average) than at any point since financial crisis. Unfortunately, momentum hasn’t turned yet. The percentage of stocks that have its 50-day moving average above its 200-day moving average is at 14%. The fact that this is still higher than the overall percentage of stocks trading above its 200-day moving average suggests that the negative momentum that has persisted this year remains in tact.
After such a sustained period of poor performance, one would expect to see some drool-worthy valuations. Canadian valuations have certainly come down but they are not quite at levels that we would consider a screaming buy. On a price to cash flow basis, Canadian equities are only slightly cheaper than US equities and are still more expensive than German or Japanese equities. From a price to cash flow perspective, Canadian equities look more attractive. They have the sixth lowest median price to book book value of any DM country index. Until these valuation levels find a bottom, there may be more pain left in this trade.