Gains driven by less stretched valuations and more leverage to the
TORONTO, Jan. 14, 2014 /CNW/ - Canadian stocks are likely to outperform
American stocks in 2014, finds a new report from CIBC World Markets
"After being trounced by New York - and Europe and Japan for that matter
- in 2013, Toronto stocks entered the year with less stretched
valuations, and greater potential for earnings gains that will pay off
in outperformance in the year ahead," says Avery Shenfeld, Chief
Economist at CIBC.
Mr. Shenfeld, who co-wrote the report with CIBC Senior Economist, Peter
Buchanan, notes that Canadian stocks also have more leverage to a
rapidly heating global economy than do their U.S. counterparts.
In its most recent forecast, "Outlook 2014: Give Low Rates a Chance", CIBC economists call for 2014 to be the first year since 2010 in
which global growth surprises on the upside. They are calling for
growth to run at a four per cent pace, about a half-point above current
consensus or International Monetary Fund expectations.
Historically, years in which global growth ran at four per cent or
better were big winners for the cyclically weighted Toronto Stock
Exchange, producing median returns well above the S&P 500. Mr. Shenfeld
notes that the "TSX has outperformed the S&P in each of the last six
years in which global growth has topped four per cent and 2014 should
add to that streak.
"That reflects the heavier weighting in Toronto's benchmark towards
resources sensitive to global activity. To this point, sluggish
activity has held back demand, in a period in which supply was
expanding in such areas as natural gas, oil and base metals. Little
wonder, then, that the resource sector has been largely responsible for
a disappointing earnings recovery of late, offsetting steady gains
elsewhere in the index."
However, he believes the increases in supply for oil, natural gas and
metals are already well priced in. "What isn't, is the pressure from
demand associated with pleasant surprises in global economic activity,"
adds Mr. Shenfeld. "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
The report calls for TSX composite earnings growth to run a
consensus-topping 13 per cent in 2014. Last year, CIBC Economics'
top-down model, which is based on a set of macroeconomic, cost and
resource market indicators, accurately anticipated a disappointing low,
single-digit pace for TSX composite earnings. The report also calls for
the S&P 500 to roughly match bottom-up earnings expectations with
growth of about 7.5 per cent, trailing the TSX pace.
Mr. Shenfeld notes that forward price-to-earnings multiples also seem
favourable to a year in which Canada lands on top. "Though stocks
aren't wildly cheap on either side of the border, the TSX's current
multiple of 14½—close to the historical average—is well below that for
the S&P 500. Toronto's average dividend is higher, and many investors
feel dividends are a better guide to longer term profitability than
current earnings, suggesting dividend-rich players should trade at a
premium. Controlling for compositional differences between the markets
suggests the typical Toronto-listed stock trades for about eight per
cent less than the average large cap member of the Big Board."
While he is calling for Canadian stocks to perform to the upside, Mr.
Shenfeld expects some of that advantage could be eroded by a further
slide in the Canadian dollar in the near term. "The loonie is still
vulnerable to another few months of the low inflation readings that
have had the Bank of Canada talking more dovishly about future rate
"For now, Canadian 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 that quells dovish talk
from the Bank of Canada, to put a floor under the loonie."
Mr. Shenfeld believes the Canadian dollar will fall below 90 cents U.S.
by next summer. The currency should bounce back to current or higher
levels by the end of the year should marginally higher inflation and
reasonable growth see the Bank of Canada renew its warnings of rate
hikes in 2015. He also expects growth in oil and other exports should
also help narrow the trade deficit, a gap that has been a feature while
Canada's domestic demand outgrew that of its customers abroad.
The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/eijan14.pdf.
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SOURCE: CIBC World Markets
For further information:
Avery Shenfeld, Chief Economist, at 416-594-7356, email@example.com; or Kevin Dove, Communications and Public Affairs at 416-980-8835, firstname.lastname@example.org