Canadian Markets Still Feel Crash : No Full Recovery Until Interest Rates Ease, Analysts Say

Canadian stock markets, whose recovery after the October, 1987, crash has stalled, will find it hard to get off the ground in 1989 until interest rates ease, analysts say.

The prospect of further interest rate increases early next year will continue to drive people into investments such as bonds and treasury bills that have higher yields and less risk, market watchers said.

“All the money is going into the fixed-income side with its very attractive rate of return,” said Ed Chateauvert, a stockbroker with Midland Doherty Ltd. “Interest rates are going to have to fall before we see any significant move on the upside.”

Canada’s banks raised their prime lending rates by half a percentage point to 12.25% on Dec. 8, their highest level since March, 1986. More interest-rate increases, which squeeze corporate earnings and share prices, are expected by analysts in the near term as Canada’s central bank responds to inflationary pressures.

“I don’t think over the next six months or so the market is going to make much of an improvement. It will be the middle of next year before stock prices begin to move up,” said Ian Russell, vice president of capital markets for the Investment Dealers Assn. of Canada, the securities industry’s watchdog group.

Partial Recovery

The composite index of the Toronto Stock Exchange, the market that accounts for 78% of the value of shares traded in Canada, has recovered only 58% of the losses resulting from the Oct. 19, 1987, collapse, Russell said.

The market portfolio index on the Montreal exchange, Canada’s second-largest, regained about 63% of the loss resulting from Oct. 19, he said.

The value of shares traded in Canada during 1988 has fallen sharply from a year ago. On the Toronto exchange the value of shares traded for the first 11 months of the year dropped 34.6% to $61.75 billion Canadian ($51.31 billion U.S.) from $94.44 billion Canadian ($78.47 billion) for the same period in 1987.

Major Canadian markets staged most of their recovery during the first three months of the year and have remained stagnant thereafter, Russell said.

This limited revival is closely linked to the skittishness of retail investors, whose confidence was shattered in the Oct. 19 collapse, analysts said.

While institutional investors’ share of trading value in Canada has risen to 60% from about 50% a year earlier, they also remain cautious, Russell said.

On the Toronto exchange, the volume of shares traded for the first 11 months of 1988 slumped about 27% to 5.04 billion from 6.9 billion for the same period in 1987.

Canada’s two smaller, highly speculative exchanges in Vancouver and Calgary will continue to be hardest hit by the withdrawal of retail investors, Russell said.