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Quebec securities in the face of the stock market decline

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The end of the year is coming soon and it is not the few rare bullish bursts recorded on occasion by the main stock market indices that suggest a possible last-ditch rally. In this year of high inflation, marked by well-regarded and repeated interventions by the monetary authorities, investors are no longer harboring any illusions and rather coolly assess the losses they will have to discount in their end-of-year balance sheet.

The behavior of stock markets in 2022 is on track to confirm their function as a leading indicator of economic activity, as more and more economists now anticipate the very high probability of the onset of a recession for the onset of 2023.

All that remains is to determine how severe the next economic downturn will be and how long it will last. The next few months will confirm everything.

Canadian investors can, however, find some consolation in the fact that the decline observed on the Canadian equity market since last spring has been less pronounced than that recorded by the American stock market and the other major markets in the rest of the world.

So far, the S&P/TSX index on the Toronto Stock Exchange has fallen 11.1% since the start of the year, compared to a drop of 23.9% for the American S&P 500 index and 14. 9% for the MSCI EAFE index, which calculates the stock market returns of Europe, Oceania and the Far East.

If the Canadian stock market has succeeded so far in posting a smaller decline than the other major indexes, it is mainly because of its heavy exposure to stocks in the fossil fuel sector.

And this is also the reason why the S&P/TSX index presents at the end of October 2022 a more favorable balance sheet than that generated so far by Quebec securities as calculated by the Morningstar Quebec Bank index. National (MQBN), which has posted a negative balance of 12.9% since the beginning of the year.

Over the past 10 years, the MQBN index, which is made up of 60 securities of Quebec companies listed on the stock exchange – out of a potential universe of 105 Quebec securities – has generally, and not absolutely, managed to perform better than the Canadian TSX index by generating an annualized return of 10.4%, compared to 7.9% for the S&P/TSX.

The unpredictability of fossil titles

In the past, the comparative performance of Québec securities compared to Canadian securities has often been favored by its non-exposure to the fossil energy sector – oil and natural gas –, which is not the case this year.

Pierre Lussier, Vice-President and Senior Manager of the Quebec Equity Division at Eterna Investment Management, set up with his colleague Philippe Côté the Quebec-Eterna Composite portfolio, which includes 34 securities of Quebec companies.

“To date, we have succeeded in generating a return comparable to that of the S&P/TSX in 2022 without having any fossil securities in our portfolio, even though they make up nearly 20% of the Toronto Stock Exchange index and they produced a return of 19.6% this year,” explains the manager.

You never invest in a security without having predictable profits. However, with fossil securities, we never have a precise idea of ​​future profits, it is pure speculation.

Pierre Lussier, Vice-President and Senior Manager of the Quebec Equity Division at Eterna Investment Management

However, the behavior of Quebec securities is not linear, as evidenced by the returns generated by the 10 largest securities in the Morningstar Quebec National Bank Index.

While Dollarama’s stock posted a spectacular return of 47% on September 30, that of Couche-Tard, 12.84%, and that of Metro, 16.12%, the declines were much more numerous: CGI -2.59%, CN at -0.28%, National Bank at -9.45%, TFI International at -5.8%, and finally Power Corporation at -17.24%.

A bear market is never a good time for an investor. We don’t know when the setbacks will give rise to a trend reversal, but we agree that an improvement in economic conditions is a necessary condition for the markets to resume a sustainable upward trajectory.

If there’s any consolation, it’s when we look at the price-earnings ratios of stocks that have fallen sharply since the start of the year.

In the list of the 10 most important positions of the securities that make up the MQBN index, we observe that that of the National Bank is trading at a price-earnings ratio of 9.27, that of Power Corporation, of 7.91, that of from TFI International, 12.36. Today’s disappointments could become tomorrow’s opportunities, even if we don’t know exactly when that tomorrow will come.



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