IIAC issues quarterly equity review

The Investment Industry Association of Canada released its second-quarter equity review Wednesday morning, filling the summer gap of market forecast advice for investors.

Looking at past equity issuance activity during the quarter and current conditions to predict movements in the coming months, Sherry Hum, financial analyst, capital markets, at the IIAC — formerly the IDA Industry Association — says the third quarter of 2006 appears to be off to a better start.

“While the market still remains vulnerable to further corrections, [and] it’s not out of the woods, conditions so far seem less turbulent than in the spring,” she says. “Encouragingly, a lot of what went down in the market during the second quarter has gone back up or stabilized. Energy and metal prices are recouping their earlier declines and the escalating Middle East conflict and upcoming hurricane season could push oil prices to new record highs.”

Although admittedly hard news for consumers, this information could be a boon for investors, following recent declines in the S&P/TSX Energy Index and the deceleration in resource financings. The weakness in trusts and resource offerings during the quarter was largely offset by new issues in non-resource sectors, including a $225 million IPO from NBC Capital Trust and a $200 million secondary offering from George Weston Ltd.

A study of overall financing activity shows that total equity issuance in Canada climbed to a near-record high of $13.9 billion in the second quarter — an increase of 11.5% quarter-over-quarter, and 27.2% year-over-year. Common equity issues reached a quarterly high of $8.8 billion — a staggering year-over-year increase of 113.5%.

Hum says while total financings in the quarter were impressive given market turmoil, a closer look shows the trend was negatively affected by the heightened volatility, with the common equity and income trust markets most directly impacted. Resource-based deals, traditionally dominant, increased just 3.2% during the quarter to $4.8 billion, while trust financings fell to $3.2 billion thanks to rising interest rates and the downturn in commodity prices.

“The sizzle in last year’s trust market has started to fizzle in 2006,” she says. “Put simply, the trust market has been up against some major headwinds in 2006. While this year’s downturn can be attributed in part to the lag effect of income trust fallout from last year, the bigger culprits behind it have been the increase in interest rates, a softer outlook for the energy sector, and possible saturation after the huge run-up of recent years. That, coupled with the flight of investors to commodity stocks this year, have been negatives for the trust market.”

Filed by Kate McCaffery Advisor.ca, kate.mccaffery@advisor.rogers.com