What Canada’s equities need to outdo their peers

An analyst says three factors may help Canadian stocks stage a comeback

What Canada’s equities need to outdo their peers
The latter half of 2017 could be the time for the S&P/TSX Composite Index to redeem itself after lagging by 10% behind the S&P 500 by 10% over the first six months of the year, according to Bloomberg data. But one analyst says a comeback in Canadian stocks depends on the same three variables that hindered their first-half performance.

A correction in Canadian equity valuations, which were high compared to both historical figures and current valuations in international markets, is the first key, according to Kurt Reiman, BlackRock’s chief investment strategist for Canada.

“Since the start of the year, 12-month forward price-to-earnings ratios for Canadian stocks have turned lower and now rest at a healthier discount relative to the US market,” Reiman said in a note. “Moreover, much of the weakness in energy prices has already been reflected in downward revisions to Canadian earnings, implying less pressure on forward-looking multiples.”

Reiman also sees a possible lift from oil-price shifts. The start of 2017 had many oil analysts estimating that prices would reach between US$55 and US$65 within the year. Now, Bloomberg data shows oil prices hovering in the mid-US$40 range, and the lower oil-price outlook is already getting reflected in earnings estimates.

“To the extent that oil represents less of a headwind for the energy sector, then the prospects for Canadian stocks should brighten somewhat, in our view,” he said.

Finally, the Canadian stock market’s particular sector exposures may prove to be a boon. The S&P/TSX Composite Index has excessive exposure to lagging sectors and insufficient exposure to leaders like technology and healthcare. However, Reiman explained, it also has significant representation from financials.

“[The financial sector is] another giant within the Canadian market cap that we believe registers as fairly valued with the potential for decent earnings growth amid a synchronized and sustained global economic expansion,” he said.


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