Historic market fall exposes Canada’s economic fault lines

Bloomberg

Never in modern trading history have Canadian stocks fallen so much in a single day of trading as they did this week.
Growing alarm over the coronavirus and plummeting oil prices have been catalysts for the slump. But one historian sees two underlying factors at play: a fractured geopolitical environment that has coincided with market volatility the world over, and Canada’s thin corporate base.
While the S&P/TSX Composite Index clawed back some of its lost ground on March 14, it is still down 24% from its record high on February 20. The decline this week alone included two harrowing drops of 10% and 12%. The latter was the biggest one-day percentage decline since at least 1977 when the first major index on the exchange was launched.
The volatility hasn’t been surprising to Dimitry Anastakis, a professor at the University of Toronto’s Rotman School of Management who’s studied market ebbs and flows. From the 1940s to the late 1980s, a generally stable political environment provided the basis for a long-term rise in equities, he said.
“We’re in the cold war and there’s US internationalism in the free-market countries that dictates a market that’s delivering pretty solid, steady returns,” said Anastakis, who holds the LR Wilson/RJ Currie Chair in Canadian Business History. “It’s the bipolar world that leads to stability.”
With the breakup of the Soviet Union starting in the early 1990s, politics has become more polarised and volatile, as have markets. The inclines have become sharper. So have the slumps.
Anastakis points to the Mexican peso crisis, Russian default, the Long Term Credit Management debacle, the tech wreck and the 2008 financial crisis as some of the shocks that have wracked markets over that time.
The democratisation of the stock market and advent of 24-hour business news has only inflamed the volatility, he said. “I know this is going to be a terrible analogy but it’s kind of how the weather channel freaks people out every time there’s a snowmaggedon,” Anastakis said. “It puts us on this roller coaster.”
While these new factors are affecting all stock markets, Canada has its own Achilles heel — a big weighting to the energy industry in the index. At about 13%, down from 15% since the rout, it is the biggest in the Group of Seven.
That has swelled as the country’s manufacturing base has shrunk. Unlike in the US where technology has become a mighty force, there hasn’t been a lot to take its place. Canada’s economy has been driven by a consumer and spending boom for years with productivity middling and few companies of much substance listing on the stock market.
Anastakis noted that oil was tumbling as Bombardier Inc replaced its chief executive officer, the latest chapter on the company’s dramatic retrenchment which has seen it cede its marquee jet programme and sell off its rail business.
“I was in my MBA class talking about it saying, this is bleak,” he said. “The last kind of international manufacturing entity of real substance in Canada is probably Magna,”
he said referring to the Aurora, Ontario-based auto parts maker.
Anastakis believes the hit to globalisation from the coronavirus and US President Donald Trump’s tariff war may permanently change the way economies and societies function. “As quickly as we create networks, they can be destructed,” he said.
But markets? They will soldier on, he said.
“If you look at the market over last 80 years, it’s still a positive story,” Anastakis said. Growth usually emerges from some corner of the market no one expects.
Canada has produced one new growth star in technology, Shopify Inc.