After 2017 underperformance, S&P/TSX continues to lag

After 2017 underperformance, S&P/TSX continues to lag

After 2017 underperformance, S&P/TSX continues to lag

Canada’s stock market limped out of 2017 as the worst performer among developed-country equity markets. And based on its performance over the past few months, things aren’t getting much better.

“The benchmark Canadian stock index fell 2.7% during the three-month period [ended Feb. 28], while the S&P 500 Index gained 3% and the MSCI World Index advanced 2.3%, all in US dollar terms,” said RBC Global Asset Management (RBC GAM) in its latest Global Investment Outlook.

The country’s lagging performance was likely caused in part by concerns about how sustainable its economic growth and competitiveness are, as well as uncertainty surrounding NAFTA. According to RBC GAM, markets are expecting aggregate earnings for the S&P/TSX to reach $990 in 2018 and $1,100 in 2019, with the financials, energy, and materials sectors being the biggest growth contributors.

“The NAFTA negotiations remain a potential headwind for the Canadian economy and equity markets,” the company said, citing the slow progress over the past year of negotiations. The Canadian housing market, an important factor for the economy and banking industry, faces challenges from regulatory changes in Toronto as well the run-up in household debt that’s exacerbated by higher interest rates. Still, continued improvement in labour markets should help speed up income growth, potentially mitigating some of the pressure.

The report added that rising rates could also weigh on REITs; their investment returns will be driven by improvements in operating income and solid cash-flow growth. But the banking sector is expected to pick up the slack, as the current operating environment — which includes a hawkish rate outlook from the Bank of Canada, continued loan growth, and expense controls — supports consensus estimates of mid- to high-single-digit growth.

Globally, crude oil prices have rallied, but Canadian energy producer have not benefited as much because of pipeline bottlenecks that have caused pricing discounts for Canada’s heavy crude. “No new pipeline capacity is expected to come online until late 2019, and rail transportation has been slow to clear the glut,” RBC GAM said. “Producers of Canadian natural gas are also experiencing issues getting their exports to areas of demand.”

A possible silver lining could come from accelerating US growth, which would impact industrial spending positively and possibly bolster Canadian exports. The employment gains from last year, which hint at some economic strength, could help Canada achieve moderate GDP growth of 1.75% in 2018.

“We expect the BOC to hike the policy rate to 1.75% over the next 12 months, and the forecast for the US is for an increase to 2.38% from 1.38%,” RBC GAM said. “Policy-rate and yield differences between Canada and the US are likely to set the path for the Canadian dollar over the foreseeable future.”

 
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