November was another positive month for markets, with almost all asset classes taking part. The S&P 500 and MSCI World Indices each gained 1.7% during the period, with strength from technology and consumer discretionary sectors offset by weakness in telecom and industrials. In Canada, the TSX lagged global indices, up 0.3%, after outperforming in October. The industrial sector led the declines in Canada, while energy was also down. Energy softness was in opposition to the 9.5% gain in WTI, as the difference between WTI and Canadian oil diverged to $17, the widest gap since August 2015, due to a pipeline leak from TransCanada’s existing Keystone pipeline in South Dakota. As the pipeline remains down, investors fear a buildup in supply of Canadian crude that cannot be used in refineries. The US 10-year yield dropped 99bps during the month to 2.33%. The yield on nearer-term treasuries rose 15bps to 1.75% on expectations of further rate rises and an above-consensus CPI print. A flatter yield curve has often been cited as recessionary and the 58bp difference between the 2- and 10-year yields is the lowest reading since November 2007. However, market participants seem indifferent to the potential impact of a flattening curve, potentially betting on a further acceleration of GDP to boost the long end.
The Canadian cannabis industry continues to defy expectations. Investors remain excited about the financial impact that recreational legalization will have on the industry. The embedded chart highlights the year-to-date gains for some of the larger-cap names in Canada. With surging stock prices, market participants are attempting to consolidate the industry by using their shares as currency to acquire competitors. Aurora Cannabis (TSE: ACB) took advantage of its 268% gain to offer to purchase Cannimed Therapeutics (TSE: CMED) in an all-stock deal valued at a 57% premium to their 15-Nov-17 stock price. The deal would make ACB the second largest player in the Canadian cannabis space. CMED is encouraging its shareholders to reject the deal, citing the elevated value of ACB stock as inadequate compensation. CMED subsequently offered to purchase Tragically Hip-backed Newstrike Resources (CVE: HIP) just five months after its listing on the Canadian Venture Exchange.
The wave of consolidation in Canada could just be beginning as companies attempt to achieve scale – the cost savings that occur as production grows and efficiency increases. Ernst & Young surveyed a number of senior leaders and board members at 11 licenced producers in Canada and the primary focus across the industry was vertical integration. The opportunity is promising domestically with 500,000 estimated patients by 2021, equating to 150,000 kilograms of flower. But, it extends beyond Canadian borders as other G-20 countries seek to become the second nation to federally legalize marijuana. However, the aggressive use of inflated stock to execute mergers hints that insiders may even consider their stock to be overvalued. Time will tell, but we know that the market will look drastically different in one year from now, when risk and reward will be intensified.