If you pay attention to daily stock-market moves, you might think that 2012 was a bust. Europe’s still struggling, America’s deep in debt, Canada’s housing market could crash at any moment and markets have reacted to all of this in fits and starts. But look at the year-to-date charts of most stock markets and you’ll find that nearly all of them are up. Even the Athens Stock Exchange General Index, the benchmark for the most economically challenged country in the world, is up 25% this year. Overall, it was a good year for investors. Your returns could have been even better if you bought into the right countries, companies and sectors.
The giant U.S. market, for one, fared better than expected. The S&P 500 was up nearly 12% at the end of November; the Nasdaq was up about 14%. Many experts, including Anil Tahiliani, a North American equities portfolio manager with McLean & Partners, expected single-digit returns at best. “People were cautious on the U.S. economy,” he says. “Would there be another double dip? How strong would the consumer be? People were concerned about housing, too.” Unemployment was still high, and many thought health-care reform would have a negative impact. It turned out, much to Tahiliani’s surprise, that none of these concerns could hold back a real, if slow, economic recovery. The housing market is on the mend, the job picture is improving and corporate earnings have been impressive.
For Daniel Cheng, Matco Financial’s vice-president and portfolio manger, the big surprise wasn’t just how well America did, but also how big a gap there was between the U.S. and Canadian market. The S&P/TSX composite index was up just 2.2% at the end of November (5% including dividends), and while that was a far better result than the 11% drop in 2011, it was still “worse than expected,” he says. A struggling energy sector is the main reason our market didn’t do better. With the sector accounting for 25.5% of the market, the natural gas glut and discounted prices for Canadian oil affected returns. China’s slowdown hurt other commodities, such as iron ore and copper, too. Energy and materials were the two worst-performing sectors this year, down 6.9% and 8.3%, respectively, at the end of November.
Investors looking outside of North America would have done well in Europe of all places. The DAX, Germany’s main index, is up nearly 24% year-to-date, while the CAC 40, France’s stock market benchmark, is up 10%. “That’s a surprise given all the headline risk out of Europe,” says Tahiliani. The reason these two markets have done well, and especially Germany, is that most investors flocked to high-quality investments this past year, says Ian Cooke, a vice-president and portfolio manager with QV Investors. In Europe, Germany is the strongest economy with plenty of still profitable businesses. France too, says Tahiliani, has benefited from this flight to safety. “They have a higher credit rating, and while their banks are struggling, overall the economy is doing well.”
Within Canada, the big winners this year were consumer discretionary and consumer staples stocks, whose sub-indexes were up 12.1% and 12.3%, respectively. These sectors, which include retailers, auto-parts companies, food businesses and essential household items, got a boost from income-seeking investors who wanted to hold stable, dividend-paying companies. “That was the overarching theme for the year,” says Cooke. “Companies that provided people with yield and were able to grow and support that dividend did well.”
Unfortunately, there were more losers than winners in the Canadian market. Besides energy and materials, utilities were down 6.3%, while tech, thanks to Research In Motion’s horrendous performance, was down 9.1%. The utility sector’s poor returns might surprise some, considering the sector is typically a favourite among yield seekers. However, valuations may have become stretched after a 6.5% rise in 2011. Even now the sector has an awfully high forward price-to-earnings ratio of around 19.
The sector story is similar outside of Canada. Paul Moroz, Mawer Investment Management’s deputy chief investment officer, points out that many emerging-market consumer staples companies did exceptionally well this year because they offered investors stability, dividends and growth. Two stocks he scored big on were Philippines-based Alaskan Milk Corp., which saw an 80% return in the three months before it was bought out in March, and Singapore beverage and food company Super Group Ltd., which is up 126% year-to-date. The U.S. financial sector also fared well this year, despite JPMorgan’s $5-billion-plus “London whale” trading gaffe. The industry is up about 17%, partly due to Bank of America’s 77% year-to-date return and Fidelity Bancorp’s 87% climb over the past 26 weeks.
Of course, in every sector there are stars and dogs. One of the biggest disappointments for investors was Research In Motion, which was down more than 50% between January and September, though its share price has bounced back somewhat since. Another dud was Canadian Natural Resources, which was down nearly 26% at the end of November. It’s one of the country’s largest oil and gas producers, but, says Cheng, price differentials between Canadian and world oil prices, low natural gas prices, cost inflation and project delays caused investors to get antsy.
Some Canadian gold companies also fared poorly. Barrick Gold, for instance fell 25%, while Goldcorp is down nearly 14%. Many gold companies, says Cooke, saw inflation rise faster than the price of gold, volume was lower than expected and some had management problems. “There were numerous issues,” says Cooke. “Some companies were struck with one, some with several.”
One of the companies Cooke did like this year was Alimentation Couche-Tard, which is up nearly 50% year-to-date. Agrium, the Calgary-based fertilizer company, was one of Tahiliani’s favourites. The company is up 47% this year, and it increased its dividend twice since Jan. 1. It bought back $900 million worth of shares and also benefited from higher nitrogen and corn prices. It had a great run, he says, despite the fact that its biggest shareholder, New York–based hedge fund Jana Partners, wants to break up the company.
Internationally, two big stars were Fuchs Petrolub, a German-based lubricant maker, and PayPoint, a British-based business that allows people to prepay their utility bills. Both stocks are up around 60% on the year. Moroz likes these businesses because both pay a dividend—2% and 3%, respectively—and have recurring revenues. “This is a rather defensive business model,” he says of PayPoint.
While there are plenty of other winners and losers on the market this year, the ones that did the best were, generally, companies that provided stability in a still uncertain market. They were dividend payers, acquirers and operations with sound business plans, cash on hand and good earnings growth. It’ll likely be the same story next year. Be sure to look beyond Canada, Cooke advises. It’s likely our market will still lag in 2013, so diversification is key. Look at owning high-quality companies with headquarters in other parts of the world. “There are lots of good management teams running high-quality businesses internationally,” he says. “Now’s the time to be seriously assessing those opportunities.”