Optimistic investors can lift stocks: analyst
Canadian stocks are lagging their international peers this year, but perhaps they could perk up if investors stop being such pessimists.
At least, that’s what BMO’s chief investment strategist Brian Belski believes. His latest prediction — which follows his successful bet that the S&P/TSX composite index would outperform its U.S. counterpart in 2016 — comes as the same benchmark is down since the start of 2017, with persistently low oil prices sapping energy stocks, the index’s second-largest sector after financials.
But Belski said Canadian investors are focusing on the negative, particularly the ongoing outcry over U.S. President Donald Trump, while the Canadian economy is expanding, jobs are being created and oil prices have climbed out of their 2016 lows.
The strategist has likened Canadian investors to Eeyore — the depressed donkey from Winnie-the-Pooh — and are missing the forest for the trees
“And the forest is that Canadian companies are in very good condition, and that’s why we think there’s an opportunity for Canadian stocks to go higher from here,” he said in an interview.
The S&P/TSX composite this year is down about 1.1 per cent “and remains one of the only major markets to have negative price performance,” Belski said in a recent research note. By comparison, the U.S. S&P 500 has gained about 10.1 per cent on the year.
Belski attributes the TSX’s decline to money chasing emerging markets, Europe and yield.
His report, however, said recent valuation trends back up the position that Canada is “bottoming,” and he said the money will ultimately rotate towards this country.
“S&P/TSX valuations have become attractive, with our S&P/TSX valuation composite relative to the S&P 500 valuation composite approaching previous cycle lows,” Belski said in his report. “Since 1991, the TSX has posted an average outperformance relative the S&P 500 of 6 per cent during the six-month period following a trough in relative valuations.”
Moreover, he said, economic trends are pointing to Canadian equities bouncing back.
“Canadian economic data has largely confirmed that excessive pessimism toward Canada in the first half of the year is overdone,” Belski notes. “For instance, economic surprises have been largely positive throughout the year, GDP forecasts have consistently been revised higher, and economists are now forced to chase a more hawkish Bank of Canada.”
Canada’s streak of good economic news was interrupted Thursday when Statistics Canada reported manufacturing sales in June were $53.9 billion, down 1.8 per cent from May. But compared to June 2016, sales were up by 6.2 per cent.