Canadian stocks will beat U.S. stocks in 2014, finds a new report by CIBC World Markets.
“After being trounced…in 2013, [Canadian] stocks entered the year with less stretched valuations and greater potential for earnings gains,” says Avery Shenfeld, chief economist at CIBC, who co-authored the report.
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These findings mesh with those of CIBC’s 2014 forecast, which says this year will be the first period since 2010 that global growth surprises on the upside; the bank expects 4% global expansion over the next twelve months.
A surge in performance would boost the TSX, adds the bank. It predicts median returns will be well above those of the S&P 500 in 2014.
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“[The] TSX has outperformed the S&P in each of the last six years [during] which global growth has topped 4%,” says Shenfeld.
This has occurred due to the “heavier weighting in Toronto’s benchmark towards resources [that are] sensitive to global activity,” he adds. “To this point, sluggish activity has held back demand [even though] supply has been expanding in such areas as natural gas, oil and base metals.”
As such, the increases in supply for oil, natural gas and metals are already well priced in.
“What isn’t [priced in], however, is the pressure from demand associated with pleasant surprises in global economic activity,” Shenfeld continues. “That should have oil prices steady, but oil futures trading at much less of a discount than now in the curve. Natural gas could hold onto recent gains, while base metals and lumber move higher.”
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The bank’s report calls for TSX composite earnings growth to run a consensus-topping 13% in 2014, while the S&P 500 will roughly match bottom-up earnings expectations. The latter will expand by about 7.5%.
“Though stocks aren’t…cheap on either side of the border, the TSX’s current multiple of 14.5—close to the historical average—is well below that for the S&P 500,” says Shenfeld.
He adds, “Toronto’s average dividend is higher…and controlling for compositional differences between [both] markets suggests the typical [TSX]-listed stock trades for about 8% than the average large cap member of the Big Board.”
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Potential downside
Canadian stocks may outperform but some of the gained advantage could be eroded by the falling loonie in the near term, says Shenfeld.
It’s “vulnerable to…low inflation readings that [has] had the Bank of Canada talking more dovishly about future rate moves,” he adds.
“For now,” he explains, “asset managers will want to keep some of the U.S. dollar exposure they’ve built up, perhaps doing so on the fixed income side. We’ll need to see more improvement in Canada’s trade position as the year progresses and an uptick in inflation.”
When summer hits, Shenfeld says, the loonie will have fallen below 90 cents U.S. But it should bounce back to current or higher levels by the end of 2014.
Finally, he predicts growth in oil and other exports should also help narrow our trade deficit.