CPMS 2016 Q3 Canadian Market Revie Q3... · CPMS Model Strategy Returns: Q3 2016 A majority of the...
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© 2015 Morningstar, Inc. All rights reserved.
CPMS
2016 Q3 Canadian Market Review
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Areas of Focus
1. Market Performance
2. Best sectors and stocks
3. Single factor analysis & model performance
4. Market fundamentals & outlook
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S&P/TSX Composite Performance 2016 Q3 (Price Change)
13600
13800
14000
14200
14400
14600
14800
15000
July August September
The market experienced volatility in September but ended 4.7% higher for the quarter.
+3.7% +0.1% +0.9%
+4.7%
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S&P/TSX Composite Performance 2016 Q3 versus Brent Oil
Large dip in the index in early September is somewhat correlated to oil prices.
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S&P/TSX Composite Performance 2016 Q3 versus Gold
Volatility in Mid/Late September may have been impacted by the dip in Gold prices.
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Q3 Market Performance (Total Return)
July August September Q3
S&P/TSX Composite 3.9% 0.3% 1.2% 5.5%
S&P/TSX 60 3.9% 0.6% 1.2% 5.8%
S&P/TSX Small Cap 5.5% -3.6% 3.1% 4.9%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Larger caps ended the quarter outperforming small caps.
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July August September Q3
S&P/TSX Composite 73% 48% 61% 69%
S&P/TSX 60 78% 52% 57% 72%
S&P/TSX Small Cap 63% 43% 64% 64%
0%
20%
40%
60%
80%
100%
Market Breadth (% of stocks with a positive total return)
A greater percentage of larger stocks had a positive return over the quarter.
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GICS Sectors: 2016 Q3 Total Returns
Sector Sector
Weight
Q3
Return
Q3
Breadth Best Performer % Worst Performer %
10 Energy 20.7% 6.2% 78% (39/50) Parkland Fuel Corp. +39 Baytex Energy Corp. -26
15 Materials 13.1% -1.1% 56% (31/55) Ivanhoe Mines Ltd. +126 First Majestic Silver -23
20 Industrials 8.8% 10.8% 76% (19/25) Brookfield Business LP +41 Bombardier Inc. -7
25 Consumer Discretionary 5.2% 8.9% 74% (17/23) Sleep Country Canada +31 Corus Entertainment -7
30 Consumer Staples 4.1% 6.3% 63% (7/11) Saputo Inc. +19 North West Company -11
35 Health Care 0.8% 9.0% 100% (4/4) Valeant Pharmaceutical +24 Chartwell Retirement +1
40 Financials 33.1% 5.9% 85% (22/26) Element Financial Corp. +20 Alaris Royalty Corp. -21
45 Information Technology 2.9% 12.1% 67% (8/12) Kinaxis Inc. +29 Sierra Wireless Inc. -14
50 Telecommunications 5.3% 2.8% 75% (3/4) Rogers Communications +7 Manitoba Telecomm -1
55 Utilities 2.7% 0.7% 64% (9/14) Superior Plus Corp. +12 Just Energy Group Inc. -14
60 Real Estate 2.7% -1.5% 45% (10/22) Altus Group Limited +32 Boardwalk REIT -9
S&P/TSX Composite 69% (169/246) Ivanhoe Mines Ltd. +126 Baytex Energy Cop. -26
Technology and Industrials were the outperformers for Q3. Materials and the new Real
Estate sector were the laggards.
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Q3 BEST & WORST PERFORMERS Top and bottom 50 excluding takeovers and stocks in bottom ½ of CPMS Universe
on average monthly volume
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Q3’s 50 Best Performing Stocks
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Q3’s 50 Best Performing Stocks
Lower earnings estimate
revisions
Higher expected EPS growth
Expensive valuation metrics
During Q3,
The 50 Best shared some of
the following attributes:
High Cash Flow to Debt
Poor growth metrics
Higher earnings and price
volatility
Lower expected yields
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Q3’s 50 Worst Performing Stocks
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Q3’s 50 Worst Performing Stocks During Q3,
The 50 Worst shared some of
the following attributes:
Lower profitability metrics
Positive earnings surprise and
revisions that got worse over
the quarter
Poor P/E and P/CF ratios
Higher earnings volatility
Higher initial price momentum
Lower debt to equity ratios
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Which fundamentals did the market reward during Q3?
At the start of the period, we equally weighted the best 50
stocks using each of the most commonly used CPMS
factors separately and measured their performance.
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Single Factor Analysis
Expected growth for next year and price-to-sales factors delivered outperformance in Q3. Net
profit margin and quarterly sales momentum underperformed.
The CPMS universe was limited to stocks better than D+ for market float and trading volume.
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STYLE ANALYSIS
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CPMS Model Strategy Returns: Q3 2016
A majority of the model strategies underperformed the benchmark for the quarter. Asset Growth, D10
Dividend/Asset Growth were the largest gainers while Industry Relative and Core 20 were the laggards.
Style Portfolios Jul Aug Sep Q3
Asset Growth 5.7% 1.2% 1.0% 8.1%
D10 Dividend/Asset Growth 3.6% 1.8% 2.1% 7.7%
Triple 10 6.3% -1.0% 1.7% 6.9%
Income 5.1% -1.3% 2.7% 6.5%
Predictable Growth 2.6% 3.4% 0.4% 6.5%
S&P/TSX Composite Total Return 3.9% 0.3% 1.2% 5.5%
Value 3.5% -0.5% 1.6% 4.6%
Dividend Growth 2.2% 1.1% 0.9% 4.3%
Bargain 4.8% -5.7% 4.6% 3.4%
Triple 5 1.1% 1.6% 0.3% 3.1%
D10 Earnings Momentum/Value 7.2% -5.6% 1.5% 2.7%
Momentum 7.6% -7.6% 3.2% 2.6%
Earnings Value 2.3% -0.4% 0.3% 2.3%
Dangerous 1.4% -1.3% 1.5% 1.7%
Earnings Momentum 9.2% -7.9% 1.1% 1.7%
Industry Relative 4.1% -4.8% 2.0% 1.1%
Core 20 4.3% -5.1% -0.5% -1.5%
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MARKET FUNDAMENTALS &
OUTLOOK
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Valuations & Profitability
P/B vs. ROE (net of T-bills): CPMS Median
The margin between ROE and P/B remains strong but valuations have moved up.
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Earnings
Year-over-year earnings growth (Median & Average - CPMS Universe)
Median and average earnings have moved up from last quarter; average earnings growth is
predicted to improve and jump into positive territory.
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Earnings
Year-over-year earnings growth of the TSX Composite
Year over year Composite earnings are negative and have remained unchanged relative to the
prior quarter. Actual earnings have moved lower over the quarter.
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Estimate Revisions & Earnings Surprise
Average earnings surprise have moved up slightly and into positive territory. Estimate revisions
continue to trend higher and are positive.
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GICS Sectors: 2016 Q3 Overview
Sector Current
P/B
Expected
ROE
Expected
EPS Growth
Earnings
Surprise
Estimate
Revisions
10 Energy 1.0x -1.0% -11.7% 0.9% 13.7%
15 Materials 1.6x 1.6% 16.2% 0.2% 9.0%
20 Industrials 2.3x 12.2% -2.0% 0.4% 1.5%
25 Consumer Discretionary 2.0x 14.8% 3.9% -0.4% -1.3%
30 Consumer Staples 2.6x 14.3% 2.9% 1.3% -4.2%
35 Health Care 3.8x -0.6% -3.9% -0.8% -1.9%
40 Financials 1.3x 11.4% 3.4% 1.7% -2.7%
45 Information Technology 2.4x 10.8% 0.2% 0.5% -1.5%
50 Telecommunications 3.7x 21.0% -1.7% 2.1% -4.7%
55 Utilities 1.6x 8.8% 7.8% 0.5% 7.0%
60 Real Estate 1.0x 7.9% -0.1% -0.1% -0.8%
Earnings are expected to grow healthily for Materials and Utilities while the outlook for Energy
earnings is to decline. Estimates have been revised downwards in greater degree for Consumer
Staples and Telecomm.
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OTHER CONSIDERATIONS
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The Asset Mix Decision
There remains a positive spread between the Composite yield and the bond yield.
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Economic Outlook
Unemployment has increased over the quarter. Capacity utilization has declined while
inflation appears relatively unchanged from end of last quarter.
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Technical Analysis
Technicals appear to have moved more into overbought territory.
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Technical Analysis
Longer and shorter term technicals have moved higher. The composite
remains above both the 50 and 200 day moving averages.
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Historic Performance – Q4
-30%
-20%
-10%
0%
10%
20%
30%
57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15
% T
otal R
eturn
77% % positive
14 # negative quarters
46 # positive quarters
Q4 Q1 Q2 Q3 Q4
Average 3.6% 1.9% 0.7% 3.7%
Median 3.7% 2.2% 1.9% 3.8%
Std Dev 7.1% 7.9% 9.1% 7.7%
S&P/TSX Composite 4th
Quarter Performance: 1957 to 2015
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Historic Performance – Q4
GICS Sector Q4 (October – December) Performance: 1988 to 2015
Return (%) Energy Materials Industrials
Consumer
Disc.
Consumer
Staples
Health
Care Financials I.T. Telecom Utilities
Median 0.4% 3.3% 6.0% 5.3% 4.5% 4.4% 6.9% 8.0% 7.2% 4.9%
Std Dev 10.6% 10.2% 9.6% 7.3% 6.4% 14.8% 9.5% 24.7% 14.6% 8.0%
% Positive 52% 63% 74% 74% 89% 56% 93% 81% 81% 85%
Looking back to 1988, we present the median return, standard deviation
and probability of a profitable quarter for all sectors in Canada.
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Fundamental Summary
FUNDAMENTALS:
Valuations: P/B multiples have rose over the quarter but remain low relative to long-term
history.
Profitability: High Return on Equity is expected in many sectors; Energy and Materials are
the exceptions.
Earnings Growth: Year-over-year growth is mixed across sectors.
ASSET MIX DECISION: Equity yields are more compelling than ten year bonds.
TECHNICAL ANALYSIS: Technicals are in overbought territory and trending upwards.
ECONOMICS ANALYSIS: No apparent capacity constraints, the unemployment rate has increased.
Inflation remains below BOC targets.