Interim rallies notwithstanding, the Canadian stock market continues to come down from QE-inspired delusions. The below chart since 2013 shows the story. The black line is the TSX 60 market cap-weighted index (dominated by today’s most expensive companies so financials make up 40%) and the red line is the TSX 60 equally-weighted index (all 60 companies represented in equal weights so financials make up just 15%).
By stripping out the overweight in financials, we can see that the Canadian stock market has now round-tripped back to where it was in December 2013. Some of the capital fleeing falling sectors like energy and materials rotated into the last standing ‘hot’ sectors over the past two years (dividend-paying, REITS and financials). This only made these few still over-loved companies even more over-valued and dangerous for the capital bet there.
Beyond sector rotations, over the past year both foreign and domestic capital flows have been leaving the loonie and Canadian securities at the fastest pace of the 10 most developed markets. The world’s love affair with Canada and our commodities is ending in a painful divorce. It is likely things will get a good deal worse in the months ahead.