Are Canadian stocks headed towards a (relatively) big fourth quarter?
BlackRock Inc. expects global economic winds to turn in Canada’s favour for the rest of 2017, following a lacklustre nine months in which the country’s stock markets lagged their international peers.
Canadian equities are now set to outperform their counterparts in the United States, “thanks to a highly forgiving valuation discount, still-robust economic activity and improving commodity prices,” the world’s largest money manager said in its global investment outlook for the fourth quarter.
“Canada’s been underperforming in part just because of not having enough of the sectors that have been doing really well,” said Kurt Reiman, BlackRock’s chief investment strategist for Canada, in an interview. “Technology, I think, has room to continue to run, but I think there’s going to be a shift that starts to show up that will start to reward Canadian equities, which is a preference for sectors that are exhibiting some value.”
BlackRock said tech, which has been this year’s best sector, “posted outsized earnings growth and accounted for roughly half ” of U.S. equity returns.
Information technology, however, makes up less than three per cent of the S&P/TSX Composite Index, which has lagged this year compared to its stateside peers. The S&P/TSX is up about 3.5 per cent for 2017, while the U.S. S&P 500, whose largest sector is IT, was up more than 14 per cent.
Reiman said one of the TSX sectors in which he sees relative value is energy, which has been dealing with a WTI oil price hovering in and around $50 per barrel this year.
Reiman, however, said the price stability could be good for the sector.
“If energy prices just hang in, in this range, then I think it’ll be a better managed business with more predictable earnings and more predictable dividends,” he said.
Canadian equities also had a much tougher act to follow this year, as they gained about 18 per cent in 2016, according to Bloomberg.
Brian Belski, the chief investment strategist at BMO Capital Markets who predicted that strong Canadian stock performance, has often likened investors’ pessimistic approach this year to “Eeyore,” the pessimistic donkey from Winnie-the-Pooh.
“Indeed this ‘Eeyore’ complex has been the defining theme for Canadian equities throughout 2017 and has resulted in Canada being one of the worst-performing equity markets year to date,” Belski said last week in a note to clients. “However, we believe this is likely to change as stronger thanexpected earnings growth, and broadly improving fundamentals will ultimately support a strong back-half recovery in Canadian equities.”
Belski wrote that analysts and investors have been grappling with the recent reality of energy prices, “resulting in the sharp underperformance of the sector so far this year.”
“Analysts on average have now marked 2018 and 2019 WTI assumptions to be in line with current spot levels; we believe this likely limits further downside to expectations, and potentially sets the stage for positive surprises,” Belski added.
Worldwide, BlackRock sees economic growth continuing. This could play to Canada’s traditional strengths, such as the energy and mining sectors.
“Canada’s export-heavy economy is well positioned to take advantage of the synchronized global expansion and corresponding pickup in trade volumes, notwithstanding the loonie’s sudden appreciation over the summer,” BlackRock said. “Moreover, rising commodity prices alongside a weakening greenback and steady growth in global demand bode well for Canada’s natural resources sector, in our view.”