(Corrects Bank of Canada forecasts for GDP growth in the second-to-last paragraph in story published Nov. 13.)
Sales (SPTSX) at Canadian companies are declining for the first time in 12 quarters as commodity prices head for the first annual retreat in four years amid slowing growth from China to Europe.
Companies in the Standard & Poor’s/TSX Composite Index have posted a 7.4 percent drop in third-quarter sales, based on data compiled by Bloomberg of the 188 firms that reported from Oct. 1 to Nov. 12. Barrick Gold Corp. (ABX), Canadian Natural Resources Ltd. (CNQ) and Encana Corp. (ECA) are among companies reporting lower revenue for the quarter after the S&P GSCI Index of 24 raw materials slid 11 percent from this year’s high in February.
China’s weakest economic expansion in 14 quarters and the debt crisis in Europe has curtailed demand for raw materials, reducing earnings for Canada’s biggest exporters. The S&P/TSX is up 1.5 percent this year, trailing all developed markets in the world except for Portugal and Spain, according to data compiled by Bloomberg.
“The slow-growth economic environment is catching up with revenues,” said Craig Fehr, Canadian market strategist with Edward Jones, on the phone from St. Louis. “The big three sectors: energy, materials and financials, are all having tough quarters driving earnings growth.”
Earnings in the S&P/TSX have fallen 12 percent during the third quarter, based on data compiled by Bloomberg of companies that have reported so far. That adds to a 13 percent drop from the second quarter, which was the biggest retreat since 2009.
Revenue among financials, raw-material producers and energy companies has fallen the most among 10 industries in the Canadian equity benchmark. Quebecor Inc., Iamgold Corp. and Dundee Corp. are among the 36 companies in the S&P/TSX scheduled to report earnings in the next two weeks.
The major banks have yet to release quarterly earnings. Royal Bank of Canada, the nation’s largest lender, is set to give results on Nov. 29 and Toronto-Dominion Bank will report on Dec. 6.
“It will be very difficult for the banks to deliver anything beyond mid-single-digit revenue and earnings growth,” said Paul Taylor, chief investment officer with BMO Harris Private Banking. He helps manage about C$18 billion in Toronto. “The capital markets business is constrained by activity and the wealth management business is reeling from weak markets.”
About 44 percent of companies that make up the S&P/TSX are commodity producers and financials comprise about 32 percent of the index, according to data compiled by Bloomberg.
Barrick, the world’s largest gold producer, on Nov. 1 reported lower-than-estimated earnings as mining costs rose more than expected and production fell. That led shares of the Toronto-based company to a 9.5 percent plunge, the most in three years.
Canadian Natural Resources, the nation’s third-largest oil and natural gas producer, fell 3.6 percent on Nov. 8, the most in four months, after reporting a 57 percent decline in third- quarter profit on lower fuel prices. The company, based in Calgary, has plunged 27 percent this year.
Encana shares sank 3.1 percent on Oct. 24 after posting a loss for the quarter and a 56 percent decline in revenue. Canada’s largest natural gas producer cut its average production by 14 percent during the quarter as prices fell 29 percent during the quarter from year-ago levels, according to a statement from the Calgary-based company.
Manulife Financial Corp. (MFC), the nation’s largest insurer, earlier this month delayed its objective of reaching C$4 billion in annual profit due to “significant headwinds” in the economy. The Toronto-based company slid 1.5 percent on Nov. 8 after reporting a third-quarter loss.
The S&P GSCI Index of 24 raw materials is down 1.6 percent this year, poised for the first annual decline since 2008. Oil has lost 14 percent this year as improvements in technology including hydraulic fracturing, or fracking, boosted output from oil fields in North Dakota, Texas and Oklahoma.
Among raw-material producers in the S&P/TSX that have reported earnings, 61 percent of companies missed analysts’ forecasts and 72 percent reported shrinking profit, according to data compiled by Bloomberg.
Stocks may rise should American lawmakers find a solution to the so-called fiscal cliff of $607 billion in automatic tax increases and spending cuts scheduled to take effect in 2013, said Kien Lim, associate equity strategist with RBC Capital Markets. The U.S., Canada’s largest trading partner, will likely enter a recession in the first half of 2013 if a resolution is not found, according to the Congressional Budget Office.
“We’d be more positive if that wasn’t in the way,” Lim said on the phone from Toronto. Global purchasing managers indexes “do look to be bottoming, which we equate to a better earnings outlook for the TSX in the second half of next year.”
China’s Purchasing Managers’ Index climbed to 50.2 in October from 49.8 in September, the first time that measure of manufacturing sentiment has risen above 50 points since July, the National Bureau of Statistics and China Federation of Logistics and Purchasing said on Nov. 1. A reading above that level indicates economic expansion.
Canada’s central bank has predicted that the economy will expand at a 2.2 percent pace in 2012, a second consecutive year of slower growth. Gross domestic product will increase 2.3 percent and 2.4 percent in the following two years, according to the Bank of Canada’s estimate.
“Sell your resources,” said John Stephenson, fund manager with First Asset Investment Management Inc. in Toronto. His firm manages about $2.7 billion. “Things have really deteriorated in the last few months with what we’re seeing globally, so it’s not surprising to see a pullback in just about every commodity including oil.”
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