Canada
20 August 2013
Hit by a flat equity sector and a wavering currency—but Canada is not down and out just yet. SLT reports
Image: Shutterstock
Finding Opportunities as Headwinds Continue was the hopefully entitled report by Ernst & Young in its Q2 2013 analysis of the Canadian mining sector.
The report told of gold prices declining in the second quarter due to growing concerns around the tapering of quantitative easing. By mid-July prices stabilised, but they stopped at a level far lower to that of last year.
Concerns over the precious metal had a knock-on effect on mining, with the sector’s equities plunging in Q2. The Canadian Mining Eye index plunged deeper and closed down 34 percent in Q2 2013, and down 42 percent year-on-year.
But, said Ernst & Young, mining companies are strategising on how to turn the rain around; using examples of BHP Billiton disposing its copper mine and both Barrick Gold and Newcrest Mining reducing headcount—to prove that changes are indeed being made.
Rob Ferguson, senior vice president of capital markets at CIBC Mellon, comments that from an asset allocation perspective, he is continuing to see a shift from Canadian equities into alternatives—within Canada as well as into emerging markets.
“From a lending perspective, the impacts depend on the specifics of the shift. Moving into emerging markets can be positive for lending returns, while moving into private equity or infrastructure typically yields no revenue opportunity.”
He adds that there has been flat demand for Canadian equities through the summer doldrums. Weak demand for resources may have led to falling gold prices, sluggish oil prices and flat commodities prices; but this has had little impact on securities lending volumes or rates.
“Exceptions have been few and unexciting: Canadian Oilsands and Barrick Gold have seen decent demand but at relatively low levels. Big deals in the retail sector: Loblaw Companies Ltd./Shoppers Drug Mart ($12B) and Hudson’s Bay Co/Saks Inc ($2.4B) show promise that has yet to be fulfilled. The strongest demand is for Blackberry, with virtually all available shares out on loan at premium rates.”
Currency woes
A weak currency has been another concern for the country. The Canadian dollar falling to its lowest level in more than 18 months in June, as the US dollar continued to flex its muscles.
But Ferguson says that according to research by the economics team at his parent company CIBC, the Canadian dollar has actually been fairly resilient lately, strengthening just after many analysts downgraded their calls for the currency (based on fears of the effects on Canada of tapering by the US Federal Reserve Bank of New York).
“As in the US, uncertainty over American Federal policy has added to volatility. A number of current factors are lending strength to the Canadian dollar, including favourable rate differentials, rising oil prices and robust domestic economic figures.”
“While the CIBC economics team still projects that the Canadian dollar will be a touch weaker by year-end, they note that it could hold at current levels for the near term. Just a few months ago, there were quite a few foreign investors making public calls that they were ‘shorting Canada’—further mirrored in speculators’ increasing net short Canadian dollar positions. But that was ill-timed, as data quickly began to surprise on the upside, with housing and consumer indicators pointing to robustness.”
Ferguson adds that other factors are having a direct impact on Canada’s lending market as well; pointing to Stephen Poloz, the new Governor at the Bank of Canada leaving the central bank’s overnight target rate at 1 percent (where many economists and analysts are predicting it will stay until mid-2014), as an example.
“New demand for Canada Housing Trust and various Canadian provinces have boosted non-cash balances, and cash collateral loans have also advanced. Credit rating downgrades in other parts of the world—particularly of sovereign governments—have pushed up demand for Canadian AAA-rated government collateral among lenders, with strong demand for Canadian treasuries and certain Canadian bonds going special for the first time in recent memory.”
Finance data flourishing
The positive attitude must be catching, as securities finance data provider DataLend expressed enthusiasm in the market.
“Since the launch of DataLend in January 2013, several key Canadian firms have joined the securities finance market data provider,” says Alexa Lemstra, the vice president of sales for EquiLend Canada.
“On loan data for the Canadian market has grown to $84 billion and $1.4 trillion globally. Market data is a significant piece of the trading community’s day, and the release of DataLend has been met by strong market interest from the Canadian market.”
“Despite the slow summer, the Canadian securities lending picture is quite bright,” concludes Ferguson. “Clients continue to expand their participation in securities lending programmes as they seek additional stable sources of risk-adjusted returns. At the end of the day, Canada’s fundamental characteristics— prudence, stability and effective regulation—help set us apart in an uncertain world and give participants confidence as they grow their programmes.”
The report told of gold prices declining in the second quarter due to growing concerns around the tapering of quantitative easing. By mid-July prices stabilised, but they stopped at a level far lower to that of last year.
Concerns over the precious metal had a knock-on effect on mining, with the sector’s equities plunging in Q2. The Canadian Mining Eye index plunged deeper and closed down 34 percent in Q2 2013, and down 42 percent year-on-year.
But, said Ernst & Young, mining companies are strategising on how to turn the rain around; using examples of BHP Billiton disposing its copper mine and both Barrick Gold and Newcrest Mining reducing headcount—to prove that changes are indeed being made.
Rob Ferguson, senior vice president of capital markets at CIBC Mellon, comments that from an asset allocation perspective, he is continuing to see a shift from Canadian equities into alternatives—within Canada as well as into emerging markets.
“From a lending perspective, the impacts depend on the specifics of the shift. Moving into emerging markets can be positive for lending returns, while moving into private equity or infrastructure typically yields no revenue opportunity.”
He adds that there has been flat demand for Canadian equities through the summer doldrums. Weak demand for resources may have led to falling gold prices, sluggish oil prices and flat commodities prices; but this has had little impact on securities lending volumes or rates.
“Exceptions have been few and unexciting: Canadian Oilsands and Barrick Gold have seen decent demand but at relatively low levels. Big deals in the retail sector: Loblaw Companies Ltd./Shoppers Drug Mart ($12B) and Hudson’s Bay Co/Saks Inc ($2.4B) show promise that has yet to be fulfilled. The strongest demand is for Blackberry, with virtually all available shares out on loan at premium rates.”
Currency woes
A weak currency has been another concern for the country. The Canadian dollar falling to its lowest level in more than 18 months in June, as the US dollar continued to flex its muscles.
But Ferguson says that according to research by the economics team at his parent company CIBC, the Canadian dollar has actually been fairly resilient lately, strengthening just after many analysts downgraded their calls for the currency (based on fears of the effects on Canada of tapering by the US Federal Reserve Bank of New York).
“As in the US, uncertainty over American Federal policy has added to volatility. A number of current factors are lending strength to the Canadian dollar, including favourable rate differentials, rising oil prices and robust domestic economic figures.”
“While the CIBC economics team still projects that the Canadian dollar will be a touch weaker by year-end, they note that it could hold at current levels for the near term. Just a few months ago, there were quite a few foreign investors making public calls that they were ‘shorting Canada’—further mirrored in speculators’ increasing net short Canadian dollar positions. But that was ill-timed, as data quickly began to surprise on the upside, with housing and consumer indicators pointing to robustness.”
Ferguson adds that other factors are having a direct impact on Canada’s lending market as well; pointing to Stephen Poloz, the new Governor at the Bank of Canada leaving the central bank’s overnight target rate at 1 percent (where many economists and analysts are predicting it will stay until mid-2014), as an example.
“New demand for Canada Housing Trust and various Canadian provinces have boosted non-cash balances, and cash collateral loans have also advanced. Credit rating downgrades in other parts of the world—particularly of sovereign governments—have pushed up demand for Canadian AAA-rated government collateral among lenders, with strong demand for Canadian treasuries and certain Canadian bonds going special for the first time in recent memory.”
Finance data flourishing
The positive attitude must be catching, as securities finance data provider DataLend expressed enthusiasm in the market.
“Since the launch of DataLend in January 2013, several key Canadian firms have joined the securities finance market data provider,” says Alexa Lemstra, the vice president of sales for EquiLend Canada.
“On loan data for the Canadian market has grown to $84 billion and $1.4 trillion globally. Market data is a significant piece of the trading community’s day, and the release of DataLend has been met by strong market interest from the Canadian market.”
“Despite the slow summer, the Canadian securities lending picture is quite bright,” concludes Ferguson. “Clients continue to expand their participation in securities lending programmes as they seek additional stable sources of risk-adjusted returns. At the end of the day, Canada’s fundamental characteristics— prudence, stability and effective regulation—help set us apart in an uncertain world and give participants confidence as they grow their programmes.”
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