Canadian equities have struggled of late, with the S&P/TSX Composite Index losing 5.8% on a total return basis. There were two key factors driving this decline; continued weakness in the energy markets, and Valeant Pharmaceuticals fall from grace. The energy sector was off more than 3.3% as the outlook for oil remains weak. Until we see a stabilization in the energy markets, I expect Canadian equities to remain volatile. Valeant is another story completely. Not too long ago, it was challenging for the top spot on the TSX, with a market capitalization that rivaled RBC. However, in August, many began questioning the sustainability of the firm’s business model, sending shares tumbling precipitously. In early August, it traded at more than $346 a share. It is now trading down around $130 per share, losing nearly two thirds of its value in just a few months.
Looking ahead, barring a sharp rebound in price, Valeant isn’t likely to be a major factor that drives the market. The bigger issues will be energy, and the rate of growth in the U.S. I remain cautiously optimistic on both, and am somewhat positive on the medium term outlook for Canadian equities. Valuations appear to be quite favourable, particularly when compared with the expected earnings growth rates. Concentration within the financial and energy sector remains high, and somewhat concerning, but is less troublesome than it was before the energy selloff. Further, it is one of the most cost effective ways to access the space. Combined, these factors make this a solid pick for Canadian equity exposure.