What goes up must come down, or so some investors thought as the TSX reached record highs last week. The index surged past 15,000 with a performance that, if sustained, would mark the first time that TSX outperforms the S&P 500.
But the last time the TSX hit a new record high in 2014, it didn’t take long to enter a bear market, causing trepidation among some market spectators. According to an article from the Globe and Mail,
BMO Capital Markets investment strategist Brian Belski sees hard times in the next 12 months. “A broad policy shift in the U.S., especially relative to Canada (less regulation and renewed fiscal stimulus), will likely see asset flows swing back to the US at some point during the year,” he said.
“At this writing, the Canadian benchmark is trading at 16.4 times forward earnings (and the energy sector at 34 times),” according to a note by Stéfane Marion and Matthieu Arseneau, economists at National Bank Financial
The figure necessitates a growth of 22.6% over the next 12 months, more than twice the 10.8% earnings required to justify the S&P 500’s multiple. “For the Canadian economy to support that earnings growth, despite a limited upside for domestic demand after the debt binge and housing surge of recent years, much is riding on exports,” they wrote.
Economic indicators also point to a subdued outlook for Canada, with unemployment rising due to ongoing layoffs in the resource sector and lackluster figures showing an export industry refusing to be ignited by a weak loonie and cheap fuel prices.
In addition, the safe-haven perception that had caused investors to seek out Canada prior to the US elections might have died down as investors see upsides to a Trump presidency. “As fear and negative rhetoric potentially abate in the US during the year, global investors may indeed sharpen their focus on the US again,” Belski said.
Marion and Arseneau are skeptical with regard to the current TSX rally’s sustainability, predicting it to fizzle out and end in 2017 at 15,400. “At this juncture, until we get to know the actors a little better, we prefer to keep our asset mix unchanged with an above-average weighting in cash,” they said.
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