RBC’s bear takes on BMO’s bull in Canada

TSX Composite Index hitting 17,600 by the end of 2018 — about 10-per-cent higher than current levels. Taking the bearish view is Matt Barasch, Canadian equity strategist at RBC Capital Markets. Barasch has a 2018 yearend target of 16,300, just 1.8-per-cent above Monday’s close.

After struggling through much of 2017 in the red, Canada’s benchmark index is up 4.7 per cent this year, still the third-worst developed market amid a ferocious global rally.

Belski believes Canada is full of strong companies, citing the railways and consumer stocks like Loblaw Cos., Canadian Tire Corp., Dollarama Inc., and Restaurant Brands International Inc. Belski recommends an overweight position in financials, industrials and materials.

Belski has a strong track record of calling the market. In 2016, his year-end level of 15,300 was only 12 points off, and his 16,000 target for 2017 is so far on track — unless a Santa Claus rally gives it another boost.

Barasch, meanwhile, sees Canadian stocks as essentially range-bound for the next year. He lowered his recommendation on the S&P/TSX to market weight from overweight, blaming stretched valuations and a lack of catalysts to drive further multiple expansion.

Possible headwinds include trade threats, central banks unwinding their balance sheets, slowing domestic growth, U.S. tax reform, stagnating oil prices, U.S. election risk, and signs that China is beginning to slow.

“As markets become more fully valued and earnings are recovering, your willingness to look past some of these issues begins to wane,” Barasch said in a phone interview.

Barasch arrived at his 16,300 target by taking his 2018 earnings-per-share forecast of $930, a number he calls “fairly aggressive,” and applying a multiple of 17.5 times.

“That would be close to the 90th percentile in terms of valuation historically for the TSX, so it’s not an insignificant multiple,” he said. Barasch recommends an overweight position in real estate, food-staples retail, railroads and life insurers.

Barasch only initiated coverage of the index in May 2016, with a 12-month target for May 2017, of 15,200. It closed out that month not far off at 15,350. He then called for the benchmark to close out 2017 at 16,300 before pushing that target back to 2018.