With earnings season about to begin, fund managers don’t expect to see a recovery in profits for Canadian companies because they still struggle with a deteriorating loonie, depressed oil prices and anemic growth.
Loonie's longest losing streak since 1971 signals more losses ahead in 'perfect storm'
With the loonie in free fall – it fell below 69 cents US Friday morning – and oil plumbing new lows at worst-case scenario levels, there’s almost nothing left they are driving the Canadian economy
Companies will start reporting fourth quarter earnings in a few days amidst a bear market for stocks. The S&P/TSX Composite Index is down 22 percent since last April, a lot more than surpassing the 20 per cent threshold that need considering bearish. The index added to its losses Friday, because the TSX dropped down 2.13 per cent, or 262.57 points, to 12,073.46.
Much of the downward trajectory of the TSX has been driven through the stop by oil prices and the general weakness of the economy. But while gross domestic product has recovered from a technical recession observed in the first half of last year, depressed earnings are unlikely to recover this year, say fund managers.
“Earnings will be awful with an accumulative basis,” said Barry Schwartz is chief investment officer, Baskin Wealth Management. “The earnings recovery in the Canadian economy will probably be delayed another year.”
The biggest drag on earnings, not surprisingly, is incorporated in the resource sector, particularly energy companies. Those companies are expected to continue to struggle this year because they desperately cut costs to try and maintain profits in an unprofitable oil environment.
Companies that make a substantial chunk of profit in U.S. dollars, however, are required to become the main one bright spot for earnings this season. Last year, firms with large American sales and presence for example Toronto-Dominion Bank, OpenText Corp. and CAE Inc. saw a good start to their earnings as the value of U.S. sales increased.
“Currency is going to be the big thing, once more,” said Craig Basinger, chief investment officer, Richardson GMP. “Canadian companies with big U.S. operations reporting Canadian money is probably going to look better within this environment.”
The loonie has lost 17 percent of its value against the U.S. dollar in the past year alone, with some analysts forecasting there might be further downside before it recovers. The currency was last trading Friday at 68.82 cents against the greenback, down 0.81 of a cent from Thursday’s close.
National Bank Financial economists noted in December that the earnings of non-resource companies during the third quarter clearly benefited from the lower loonie. On average, the non-resource segment from the TSX saw earnings grow by three per cent in Q3, while resource companies recorded a contraction.
But even those companies might not be immune from oil’s fallout. The Bank of Canada’s Business Outlook Survey showed this week that investment and hiring intentions have plunged to their lowest level because the 2009 recession.
“Overall, responses to the winter Business Outlook Survey indicate that business sentiment has deteriorated as the negative effects of the commodity price shock still unfold and spread beyond the resource sector,” the bank said.
The risk of earnings contagion in the energy sector will leave a dark cloud hovering within the first a part of 2016. Schwartz of Baskin said it is likely earnings could contract further this year, though any more decline could generate a stronger bounce in 2017 if oil prices do recover.
“In a single more year we’re able to be coming off a significantly lower base, giving more room for many meaningful growth,” said Schwartz. “But in the meantime, we predict any earnings recovery in Canada is delayed.”