May 25, 2008 / 10:15 AM / 10 years ago

Strong Canadian dollar adds muscle to TSX

TORONTO (Reuters) - It’s been a bloody year for world stocks, but above the fray, Canada stands with Brazil and Mexico as the only countries with unscathed major indexes.

The pattern of course is that soaring oil has treated these three well, and left others grappling with its high costs.

But Canada has a second trump card in its hand: the steady Canadian dollar, which allows global investors to park money in North American energy stocks without worrying too much about taking a hit on foreign exchange.

“When global investors look at Canada they’re making a currency call and a sector bet,” said John Johnson, chief strategist for Harbour Group at RBC Dominion Securities.

Conventional thinking is countries that produce the hottest commodities are unlikely to see their currencies decline.

While nearly 30 percent of Toronto’s main index is devoted to energy companies, Sao Paulo’s benchmark -- which has outperformed all major stock indexes by far in 2008 -- counts oil giant Petrobras PETR4.SA as its biggest listing. And in Mexico, oil is the top source of foreign currency.

With crude futures logging record highs above $135 a barrel last week, speculators are snapping up shares of energy producers to get in on the party.

The rush has brought new capital, liquidity and a record surge to the Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE, which surpassed the 15,000-point level for the first time last week.

The Canadian dollar, meanwhile, has quietly stabilized against the U.S. dollar, settling since November in a narrow range near par as both countries have slashed interest rates to cushion the economic downturn.

“The Canadian dollar is going to stick around par for now, and, if anything, the pressure will continue to push against the U.S. dollar,” said Michael Sprung, president at Sprung & Co Investment Counsel.

The stability means that investors can ride the oil wave with stocks such as EnCana ECA.TO or Suncor SU.TO, and avoid less-stable regions of the oil-producing world.


In Canada, the No. 1 supplier of oil to the United States, the benchmark index has risen more than 6 percent so far this year. In Mexico, the world’s sixth-biggest crude exporter, the IPC stock index .MXX is up more than 5 percent.

Brazil’s Bovespa index .BVSP, meanwhile, has soared nearly 12 percent as that country benefits from growing oil production and its status as the world’s top exporter of the alternative fuel ethanol.

All other major indexes, from Tokyo to London to New York, are lower in 2008.

Although the giant credit pinch is a key culprit, oil-weary investors have also priced in the effect that inflation and higher costs will have on consumers and corporations.

“There are two types of markets in the world: countries that have lots of oil, and then there are countries that are getting crippled by the price of oil,” said Andrew Martyn, portfolio manager at Davis-Rea.

The influx of international interest in Canada has skewed the TSX’s gains heavily toward its energy shares, striking profit envy among some long-time blue-chip stock holders, observers say.

Portfolio managers, under pressure from clients, can either chase oil or wait for a pullback.

Francis Campeau, a broker at MF Global Canada in Montreal, said the question now is whether the TSX can justify outperforming the European stocks by as much as 20 percent in 2008.

“Foreigners keep buying into the TSX, and the (Canadian) dollar is not about to go down,” he said. “So until the oil bubble bursts -- and I‘m not saying it will -- there is no reason to get out of Canada just yet.”

($1=$0.99 Canadian)

Editing by Rob Wilson and Maureen Bavdek

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