Cenovus, Encana spark Canada’s best month on market since July 2016
Analysts bullish as TSX rallies alongside forecasts for more growth, oil price spike
Encana Corp. and Cenovus Energy Inc. led Canadian stocks to their biggest monthly rise since July last year and analysts see more gains to come as oil moves higher and the economy posts its fastest growth in six years.
The 2.8-per-cent jump in September marks a reversal for the S&P/TSX Composite Index, which has lagged most of the developed world this year amid a slump in energy stocks.
Even with last month’s gain, it’s still the third-worst performer among 24 developed market gauges tracked by Bloomberg, with a return of just 2.3 per cent this year.
The S&P/TSX rallied in tandem with crude prices that had their biggest quarterly gain in more than a year, boosting oilpatch companies like Trican Well Service Ltd. and Precision Drilling Corp. Oil prices rose as U.S. refineries recovered from the effects of hurricane Harvey, while OPEC and the International Energy Agency boosted demand forecasts.
Analysts have long said that a recovery in oil would be necessary for the underperforming TSX to rebound.
Most strategists believe the index is poised for more gains as higher oil and economic growth topping three per cent should offset concerns about rising interest rates.
A pullback in the dollar may also give stocks a lift. The loonie was little changed last month, after soaring almost eight per cent on the year versus the U.S. currency.
Here are three strategist views on whether the Canadian stock gains can last:
Brian Belski, chief investment strategist at BMO Capital Markets, says there’s no need to worry about the rising loonie. In fact, BMO’s research shows that in years when the dollar has appreciated in the first eight months of the year, the TSX has rallied over the next six months. The same goes for rising interest rates. Belski believes there is “excess pessimism priced into Canadian equities and a rebound in TSX performance is overdue.”
Matt Barasch, Canadian equity strategist at RBC Capital Markets,
says U.S. President Donald Trump’s tax plan “could lead to a significant shift in winners and losers” that could have a “profound and positive impact on TSX performance, given its cyclical tilt.”
The biggest Canadian beneficiaries from a reduction in U.S. corporate tax rates would include banks, life insurance companies, railroads and select consumer discretionary companies with big U.S. footprints. He adds that oil and gas producers won’t benefit directly but could be among the strongest performers due to a lift from improved U.S. growth.
David Rosenberg, chief economist ■ and strategist at Gluskin Sheff & Associates, sees Canadian equities outperforming and is more bullish on Canada than the U.S. He sees West Texas Intermediate crude prices rising to at least the mid-$50s, carrying energy stocks along with them.
“Between now and the end of the year, energy has quite a bit of catching up to do,” Rosenberg says. “The energy space will be a good place to be.” Banks also look “very attractive,” with the constraints on their earnings and upcoming regulatory changes already priced into the stocks.