Updates from 5i Research: Market and Flash Report - June 21, 2021

Barkha Rani Jun 21, 2021
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Flash Report Updates

We have a flash report with updates on nine of our coverage companies. One common theme we have noticed among our coverage companies is that those with a stronger track record before the pandemic are recovering better than those with a weaker one.

Read the latest updates by 
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Market Update - TSX Sectors YTD

As we approach the mid-point of the year 2021, we thought it would make sense to look at how stocks in the various TSX sectors have done so far. At first glance, it is worth pointing out that unlike 2020, all sectors are showing positive returns with the more cyclical sectors (consumer discretionary, energy, financials) generally showing higher returns than non-cyclical ones. We find this to be consistent with the theme of broad economic recovery which tends to benefit cyclical names more. Below you can see the year-to-date returns for each sector on the TSX:

Here are thoughts on select sectors we think are worth highlighting:

The financial sector's recovery, in particular, tends to be a good sign that economic activity is beginning to resume and that borrowers are able to pay back their loans (as we saw recently with lower than expected loan loss provisions from the big banks).

Tech was the obvious winner in 2020 with it being arguably the only sector that actually thrived due to COVID as other businesses relied heavily on technologies for things like communication and online services to adapt to the pandemic. This tech sector rally continued well into the beginning of 2021 before seeing some sell of pressure in February and May due to rising bond yields and as investors began moving into other sectors for a 'recovery play'. Despite this selling pressure, it is worth pointing out that the technology sector is still up 10% this year and ahead of materials, communications, industrial, utilities and consumer staples. This near term strength despite valuations perhaps getting ahead of themselves earlier in the year points to the continued relevance and strength of the technology sector. This also shows that it is not necessarily true that the best-performing investments in one year are the worst-performing in the next.

The energy sector, however, is an example of the worst-performing sector in one year (2020) on track to being the best performing sector this year (though it is too early to call). With the pandemic causing so much damage to the sector's economics, investors were bound to pick up this trade at a whiff of things reopening and lower valuations have certainly helped (and continue to). To address many of the questions we have seen in the Q&A, we think energy companies with the strongest balance sheets, good cash flows, and lowest depletion of cash are good candidates to consider for long-term exposure. We also think it is worth noting that the energy sector continues to have some of the highest paying dividend stocks on the TSX, so while it may be a great place to look for dividend names, it also means one should pay extra attention to the balance sheet health in this sector. In terms of upside potential, it is worth considering that although the graph above shows the sector is up about 35% this year, it is up ~80% from June last year and ~160% from March 2020 lows. This does not mean that investors have 'missed their chance' at the sector, but we also think it is important not to set very high expectations for a sector that has still struggled in the past. 

Consumer discretionary
Perhaps on the back of stimulus spending, this sector has actually remained quite robust compared to other sectors with a 2020 performance of about 36% and up 16.7% so far this year. Looking ahead consumer spending has a lot of tailwinds including people getting back to work, more of the sector re-opening and generally more economic activity.

Lastly, we think industrials are often overlooked in Canada and this is somewhat reflected by its 'average' performance in 2020 and so far in 2021. However, given how broad this sector's reach is to the underlying fabric of the economy, we think this sector is one to watch out for as borders begin to open up, and trade and supply chain bottlenecks see some relief.

So far so good for Canadian sectors in 2021, though we do not think this should come as much of a surprise given the re-opening expectations and rate of vaccinations. As always, we think the best approach is to have a long-term focus, tweaking one's portfolio, and make adjustments as new information becomes available. With such drastic changes in some sectors compared to others, it makes sense for investors to revisit their portfolios and check to see if any sector weightings need to be readjusted.

Of course, members are welcome to use our 
Portfolio Analytics service to help gauge their sector exposure.


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