Spring Fever Hits Canadian Markets

THE Toronto Stock Exchange is finally getting its own back. After lagging share prices in the United States and other world stock exchanges, the Toronto market, with a 75 percent share of Canada's trading volume, is breaking out.

"The Canadian economy and stock market have been so unbelievably depressed that maybe it's our turn," says Ian McKinnon, vice president of Thomson Kernaghan, a Toronto-based brokerage house.

The Toronto Stock Exchange (TSE) 300 was up 46 percent for the first three months of this year compared to the same period in 1992, deep in the heart of the recession. The $12.29 billion (Canadian; US$9.73 billion) of shares traded last month is up 103.4 percent compared to March 1992.

It is the final signal that Canada is coming out of its longest recession since World War II. Exports had already soared, especially to the US under the Free Trade Agreement. Even consumer spending showed new life in numbers released last week.

Inflation and interest rates are low. But corporate earnings are at a five-year high, according to a study by a Toronto analyst.

March was the first month Toronto's volume topped 1 billion shares. The TSE traded 1.3 billion shares in March, a 33.5 percent increase in February, which was also a record month.

"Toronto is more heavily based on resource stocks so that has helped," says Jim Gallagher, executive vice president of the TSE. "But there has been strength all around the list, not just in that one segment. In March golds were up; in February it was financial. There was even a surge in diamond stocks."

Two bright spots in resources have been lumber and oil and gas. Restrictions on cutting lumber in the US have meant rising prices and profits for Canadian firms. "The spotted owl hasn't hurt Canadians in the lumber business," Mr. McKinnon says.

The strength in oil and gas has come about because the "majors" - the big integrated oil companies such as Shell, Gulf, and others - have abandoned western Canada, leaving small firms to search for oil. "The majors have decided western Canada is a mature sedimentary basin so they've moved off to places such as Indonesia," McKinnon says. "The small Canadian producers are very cost effective and they're making money again."

He gave the example of Barrington Petroleum, a Calgary-based company whose stock has risen from $1.50 to $4.50 so far this year. Other junior oils have also been top performers.

Mutual funds invested in Canadian shares, especially those in the resource sector, have also benefited. Mackenzie Financial Corporation has a family of funds and those invested in resources have done well in the first quarter of 1993. A fund called Universal Canadian Resources is up 41 percent on the quarter.

"The expansion phase of the economic cycle is when the Canadian stock market outperforms other markets," says Neil Lovatt, senior vice president of investments at Mackenzie. "Our portfolios are weighted to the expansion."

The rise in the value of the Toronto market has been fueled by foreign buying, from the US and Asia.

TSE executive Mr. Gallagher, an American who once worked as a trader on the floor of the New York Exchange and was president of the Pacific Stock Exchange, says one reason for the heavy buying has been recommendations by American firms. "Salomon Brothers recommended Canadian Bank stocks," he says.

He adds that a stable Canadian dollar has helped; American and other foreign investors do not want to see the Canadian dollar fall if their money is Canadian stocks.

McKinnon also sees stability in the Canadian dollar as key to a continued recovery in the Toronto stock market, and the three other smaller exchanges in the country.

"The Canadian dollar is down a lot and, of course, that helps exporters," he says. "But the dollar was kept there by the Bank of Canada which kept rates high long after they had fallen in the United States."

High rates, adjustment to free trade, and a new goods and services tax all slowed the Canadian economy and stock markets. Investors and brokers hope the good times are back - for a while.