08/20/2015 03:30 EDT | Updated 08/20/2015 04:59 EDT

Scotiabank: Canadian Stocks ‘In Severe Correction Territory'


If your savings are tied up to any degree in Canadian stocks, you may want to take a look at your stock portfolio. Soon.

Canada’s stock markets are in worse shape than the headline numbers suggest, and have entered “severe correction territory,” Scotiabank says in a new analysis.

The Toronto Stock Exchange hit its lowest level of 2015 on Thursday, following another abysmal week for oil, with North American crude prices hitting a six-year low below $42 a barrel on Wednesday. The S&P TSX composite index closed down 299.63 points at 13,737.00, a low not seen since December of last year.

The TSX is down some 8.4 per cent over the past year, but Scotiabank’s managing director for portfolio strategy, Vincent Delisle, says that number is a “mirage.” Things are worse than that.

The bearish market has been distorted by one sector whose stocks have been soaring: health care. Those stocks have pushed up the TSX’s “trade-weighted” average, which measures the value of the market by averaging the value of all trades.

But that measure favours larger companies. If you look simply at all stock prices and average those — an “equal weight average” — the TSX is down 21 per cent over the past year, and down 9.2 per cent just since the start of this year, Delisle said in an analysis published Wednesday.

If high-flying Canadian health care stocks were excluded, the TSX should be around 12,500 instead of the 13,800 level it was flirting with Wednesday.

Still, Delisle says Canadian stocks are “extremely oversold” at this point, with stock prices already reflecting the “dire scenarios” for Canada’s energy sector. He believes investors should be looking at “buying opportunities up north.”

Valeant Makes The Market Look Better

Even as the broader market slides, Canadian health care stocks have been doing very well — more than doubling in value since the start of the year.

At the forefront of this is Valeant, whose stock value has jumped so much that last month it became Canada’s largest company, by market value, unseating the Royal Bank of Canada.

The Laval, Quebec-based drugmaker announced Thursday it is buying Sprout Pharmaceuticals, the company that recently developed “female Viagra” — a pill designed to boost sexual desire in women.

Valeant has been following a strategy of growing through acquisitions in recent years, helping the company nearly double its stock price this year. But the Sprout buyout didn’t go over well with investors. Valeant’s shares fell more than 5 per cent Thursday, to $303.14.

Still, the company’s shares are up 83 per cent so far this year.

This chart, published by BMO last month, illustrates what has been going on with healthcare stock prices in Canada. Notice any change right at the end there?

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