The boom in the energy sector has fattened wallets in the oilpatch in the past few years, but it has also significantly altered the face of Canada’s capital markets.

Global macroeconomic trends such as high oil prices, currency shifts and outsourcing have all had well-documented effects on Canada. Notably, they have exacerbated some of the regional differences in the underlying national economy. There has been a boost in employment and output in resources-rich regions such as Alberta but weakening production levels in provinces such as Ontario and Quebec, where there is greater reliance on industries that are under increasingly intense competitive pressure.

Not surprising, the effects of the regional shifts are being reflected in the capital markets. The Alberta Securities Commission has published a report, updating a 2004 study, which reveals some of the changes the markets have undergone in the past few years.

The report focuses on the four big provinces for capital markets: Ontario, Alberta, Quebec and British Columbia. Together, the four account for 93% of the companies listed on the Toronto Stock Exchange and TSX Venture Exchange, and 86% of the total market cap. The numbers alone highlight the concentration of the capital markets.

And two of the four, Alberta and Ontario, represent more than two-thirds of the overall Canadian market. Ontario contributes almost half (42%) of the market cap, followed by Alberta at 26%, Quebec at just 12% and B.C. with 6%.

What is most interesting is how much market shares have shifted in just two years, particularly between Ontario and Alberta. In 2004, the ASC found that Ontario accounted for 45% of the total market cap, Alberta was at 18% and Quebec ran a close third at 14%. Since then, Ontario and Quebec have both lost share, while Alberta has gained eight percentage points, making it the undisputed first runner-up in the Canadian market.

Ontario and Alberta have seen a dramatic 11% market-share swing in Alberta’s favour in just two years. Moreover, Alberta has far outpaced the remaining two provinces. Its market cap is now more than double that of Quebec and quadruple B.C.’s, a big change from 2004, when the three would have formed a fairly balanced second tier.

The shifts are taking place in an environment in which overall market growth has been very robust. Since 2004, the total market cap of companies listed on the two exchanges has grown by about 50%, the report notes, rising to about $1.8 trillion from $1.2 trillion. The market cap of Alberta-based companies has grown almost three times as fast as the market overall, jumping 138% in the past two years, to almost $500 billion from $210 billion. The shift also means Alberta has done more than its share of heavy lifting for the market, contributing 40% of the gain, more than double its initial market share.

A consequence of Alberta’s impressive outperformance in two years is that it has also fuelled a shift in sector leadership. The ASC report says the oil and gas industry is now the biggest industry in Canada by market cap, up from third place in 2004. Energy has skipped past the financial services and industrial/manufacturing sectors to take the top spot.

Oil and gas is also by far the most significant industry in Alberta; 44% of Alberta-based companies are engaged in the energy sector, representing 76% of the market cap in the province. The utilities and pipelines industry stands in a distant second place, contributing 11% of the market cap. So, although Alberta has become a market powerhouse, it is also a one-trick pony, with energy and pipelines accounting for almost all its market share.

Across Canada, energy firms now represent 29% of the aggregate market cap, despite the fact that they only account for 12% of all public companies. Financials are second, with about 26% of the market cap; with industrials in third spot, at 15%.

Income trusts are also punching far above their weight, as they represent almost 10% of the aggregate market cap but just 6% of the listings. The number of such trusts is about evenly split between Ontario and Alberta, and both account for about 37% of the trusts listed. Yet the trusts from Alberta are notably larger, contributing 64% of the income trust market cap, compared with 22% for Ontario-based trusts.

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Although Canada is known as a resources-driven market, there are big differences between resources sectors. The mining industry, in some ways, is the inverse of the energy sector. It accounts for 34% of the number of listings, but only 11% of the market cap. Mining is the most popular business for B.C.-based companies. There are about 1,200 B.C. companies listed on the exchanges, and more than 700 are miners. The majority of miners, 72%, are small to mid-sized firms, the report notes, with less than $25 million in market cap.

In the oil and gas industry, 42% of firms have market caps of less than $25 million, down from 63% in 2004. Of the firms in the oil and gas industry that have more than $25 million in market cap, 61% have market caps of more than $100 million, up from 54% in 2004.

With all its small mining companies, B.C. dominates the TSXV’s listings, accounting for 46% of issuers. B.C. has also been touched by the energy boom, as the oil and gas sector has taken over from technology as the province’s second-biggest sector.

It is clear from the report that the explosion in energy prices and the resulting boom in energy investment has boosted Alberta’s prominence in the Canadian capital markets. Not only has Alberta made significant gains relative to Ontario, but it has also distanced itself from Quebec and B.C., effectively creating a three-tier market among the provinces where there used to be two tiers.

It is also obvious that each of the regions has a distinct sector focus. Alberta’s fortunes are heavily tied to energy companies of all sizes, while junior miners dominate the scene in B.C., and Ontario is led by financials, with industrials and mining in the mix as well.

The report concludes that the ASC should be playing a more prominent role in policy development within the Canadian Securities Administrators, and that the energy industry and income trusts deserve increased attention from regulators, owing to their greater prominence in the markets. The report also notes that the very distinct provincial markets mean the regions may have unique perspectives on regulatory initiatives, and that the tiered nature of the overall market suggests regulators should be conscious of the need for proportionate regulation. What works for large-cap-dominated Ontario may not be as effective in junior-heavy B.C.

There is no disputing the diverse and evolving nature of Canada’s capital markets, but regulators don’t seem to have had much to do with it. In fact, global macroeconomic forces, such as the rise of the energy sector and the slump in domestic manufacturing, are the driving trends. Regulators may want to claim credit, but the markets might have been better off if there were fewer regulators standing in the way of efficient capital allocation.

The report also shows Canadian markets haven’t had much success attracting foreign issuers in the past two years. Foreign firms represent only 8% of the aggregate market cap in Canada, down from 11.5% in 2004. Despite bluster on Bay Street about making Toronto a centre for financing activity in certain sectors, that hasn’t happened.

The U.S. is the biggest source of foreign issuers, accounting for 6% of overall market cap, unchanged from 2004. Britain is the only other significant source of foreign listings, contributing 2% of overall market cap, down sharply from 5% in 2004.

Far from thriving because of its regulators, Canada’s markets are probably growing in spite of them. If Canada had a less fragmented system, we’d be able to woo a few more foreign issuers. IE