Which Canadian stocks are facing turmoil because of war in Ukraine?
While Canada’s resource sectors are acting as powerful shock absorbers to the financial reverberations of Russia’s war on Ukraine, there are heavy losses just beneath the surface.
Since bombs started dropping about two weeks ago, stocks on a global basis have swung wildly, taking the MSCI All Country World Index into correction territory before hopes of a diplomatic end to the conflict generated a strong bounce-back on Wednesday.
And while Canadian stocks have certainly been roiled, the volatility at an index level has been mostly to the upside, with the S&P/TSX Composite Index gaining 3.6 per cent since the invasion began.
With about 30 per cent of the Canadian benchmark index weighted in resource stocks, soaring commodity prices have translated to double-digit gains in the energy and materials sectors over just the past two weeks.
But the selloff is happening here, too. It’s just less visible.
“The boom in commodity prices is masking a lot of pain in the rest of the market,” said Jason Mann, chief investment officer at Toronto-based EdgeHill Partners.
Here are the stocks, sectors and styles that have proven most vulnerable to the recent market turmoil.
Even before the invasion, the auto sector globally was struggling with a critical shortage of semi-conductors, which are used in a range of components and sensors in modern vehicles.
Several automakers were forced to cut production, while consumers on a global spending spree increasingly encountered empty dealership lots.
The economic isolation of Russia has put the supply of microchips into even greater uncertainty by tying up key raw materials used in their manufacture. Russia produces roughly 40 per cent of the world’s palladium, while up to 70 per cent of the global supply of neon comes from Ukraine.
Market-research estimates peg a cut to global auto production of 1.5 million to three million units this year as a result, which is clearly bad news for parts companies such as Magna International Inc. MG-T +3.95%increase, Linamar Corp. LNR-T +1.47%increase and Martinrea International Inc. MRE-T +3.59%increase
Those three stocks have been among the biggest losers on the TSX, having dropped by a range of 12 per cent to 22 per cent in just two weeks. Magna is now down by 26 per cent year to date.
“The problem is not that these stocks aren’t cheap or they aren’t high quality,” Mr. Mann said. “The problem is that they’re in a downtrend. We have to wait for that to stabilize.”
The TSX isn’t exactly teeming with powerful global consumer brands. But many of the retail names that are in the composite are among the biggest recent laggards.
One reason for that is runaway inflation, which appears to be weighing on consumer sentiment. Crude oil prices well in excess of US$100 a barrel will exacerbate the upward pressure on prices, not least of which is those at the gas pump.
“This is a tax on the economy globally, and it’s a pretty big one,” said Craig Basinger, chief market strategist at Purpose Investments. “That changes behaviours and where money is going pretty quickly.”
Canadian consumer stocks that are down by at least 5 per cent over the past two weeks include Aritzia Inc. ATZ-T +8.07%increase, Premium Brands Holdings Corp. PBH-T -0.89%decrease, Canada Goose Holdings Inc. GOOS-T +4.09%increase, Sleep Country Canada Holdings Inc. ZZZ-T +3.51%increase and Gildan Activewear Inc. GIL-T +3.82%increase
The rotation out of growth stocks and into value was under way well before Russia ignited a geopolitical firestorm.
The main target for this shift was the U.S. tech sector, which dominated pandemic-era stock trading. But a slowdown in global growth combined with the shift in monetary policy toward rate hikes and stimulus withdrawal sparked a retreat from Big Tech.
The Canadian stock market is heavily skewed toward value stocks, but the relatively few high-growth names here have been hit hard – Shopify Inc. SHOP-T +13.59%increase chief among them. Even after a 14-per-cent single-day gain in Wednesday’s trading, the company’s market capitalization is still down by 65 per cent from its peak four months ago.
“I would really warn against buying the dip in unprofitable companies,” Mr. Mann said. “They look a lot like the cannabis trade, which continue to grind lower and find fresh lows two years after the peak.”