Canada’s bond market has been ravaged by the global commodities rout. So when a drugmaker and an aerospace company join the misery with even bigger losses, investors can’t be blamed for rushing to the exits.
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Turmoil with market heavyweights Valeant Pharmaceuticals International Inc. and Bombardier Inc. has helped push Canadian high-yield bonds to their worst performance since 2008. They trail the returns of their Group of 10 industrialized peers this year, with further risks still ahead.
The bulk of the losses stem from a collapse in commodity prices, including crude oil, as China’s growth slows and the world’s second-largest economy shifts from debt-intensive capital spending toward domestic consumption and services. Add to that the trouble at Valeant and Bombardier, as well as a potential housing bubble and an interest-rate hike by the U.S. Federal Reserve, and the economic headwinds just keep coming for Canada.
“This will likely remain a more difficult environment for some time, from both an economic and investment perspective for Canada,” said Eric Lascelles, chief economist at Royal Bank of Canada’s RBC Asset Management unit. “I don’t think we’ve freely and nimbly emerged from this experience just yet.”
The Canadian high-yield market and the Canadian economy are two peas in a pod right now
Investors in Canadian high-yield bonds have lost 3.7 per cent year to date, compared with an average positive return of 2.8 per cent among the Group of 10 industrialized countries, according to the Bank of America Merrill Lynch Global High Yield Index. And although energy companies and miners make up the majority of Canadian issuers, Valeant and Bombardier have caused the most pain for investors.
Valeant, the Laval, Quebec-based drug-maker at the center of a pricing scandal and shareholder battle-of-words featuring billionaire Bill Ackman, has lost 12.6 per cent this year. Bombardier, the Montreal-based plane and train manufacturer that has long stood as a national champion, dropped 12.4 per cent amid ballooning costs from an oft-delayed new jetliner.
“The Canadian high-yield market and the Canadian economy are two peas in a pod right now, in the sense that the Canadian economy is suffering more than most of its G-10 peers as is the high-yield space,” Lascelles said.