The Toronto Stock Exchange could set new records next year if it can continue to catch a ride on U.S. economic momentum, according to a new Bank of Montreal forecast.
The S&P/TSX Composite Index could jump 1,200 points from its current record-high position of nearly 17,000 — or 7 per cent higher — to 18,200 points as long as positive macroeconomic forces remain in the U.S., according to Brian Belski, chief investment strategist at BMO Capital Markets Corp.
The U.S. unemployment rate at 3.5 per cent is at its lowest in 50 years while the economy continues its expansion into an 11th year and inflation at 1.7 per cent is keeping consumer prices in check.
“We believe Canadian equities offer an attractive relative value opportunity within North American markets,” the analyst and his team wrote in the bank’s 2020 market outlook. “Furthermore, we believe earnings expectations remain cautious heading into 2020, leaving ample room for the TSX to under promise and over deliver with any upside compromise on trade, signs of positive life in commodities, or a rebound in growth.”
The TSX could jump even higher — by 12 per cent to 19,100 points – should a U.S.–China trade deal be achieved that ignites corporate investment, propels global growth and quells consumer fears, BMO said.
The S&P/TSX Composite Index was trading at 16,951 points Friday, down just over a quarter per cent. The index has risen nearly 19 per cent this year, trailing the S&P 500’s nearly 24 per cent increase, and the MSCI World Index’s 21 per cent jump.
The bank sees foreign investment in Canada set to rise because it’s at near record lows and North America is a more appealing destination for capital than other regions.
“Our work shows that the big three sectors (energy, financials and materials) tend to be the biggest beneficiaries of returning flows, while industrials and technology also tend to benefit during periods of renewed foreign interest,” the bank said. “As such, we believe it will be very difficult to be net underweight these areas heading into 2020.”
In energy stocks, BMO says it favours higher quality large capitalization companies that have shown resilience while oil prices have remained subdued. Among financial stocks, the bank prefers companies with strong U.S. platforms, while it was more cautious about materials because commodity prices remain volatile. “Stay defensive and focused on cash flow,” it said.
Canada as a value play? We think the answer is a resounding ‘YES’
The bank repeated its belief expressed for the past several years that “as America goes, so goes Canada” and said it sees Canadian stocks as an opportunity for so-called value investors, those who buy into companies that are trading at less than what they could really be worth.
“We believe there is an increasingly attractive value proposition developing within Canadian equities with relatively high U.S. revenue for those investors that would like to increase their U.S. growth exposure,” BMO said. “Canada as a value play? We think the answer is a resounding ‘YES,’ especially when examining non-resource sectors.”
BMO is optimistic about Canadian energy sector stocks, saying historical performance shows the current three-year downturn is matched only by the 1980s and the industry is ripe for a turnaround despite the outlook for subdued oil prices to continue.
“Given our continued Canadian energy favouritism relative to U.S. energy (thanks to heightened cash flow, dividends and management prowess), we believe there is a very good chance that the sector can snap its string of negative performance in 2020,” the bank said.
Turning to the U.S. stock market, BMO forecasts the S&P 500 could advance to 3,400 points next year from its current position around 3,100 as economic momentum continues while inflation remains in check. There could be periods of higher volatility due to trade uncertainties, particularly with China, it said.
The bank is sticking to its call nearly a decade ago that U.S. stocks would enjoy a 20-year bull market. “Many of the same core principles remain in place — namely, U.S. corporate superiority in terms of earnings stability, cash flow, innovation, product and services, and company management,” BMO said.
A swing to a bull or bear scenario will likely depend on the success of trade negotiations with China, the bank said. The S&P 500 could hit 3,675 points after a substantial agreement, or fall to 2,775 if talks take a turn for the worse, it said.
The same rationale along with lower oil prices, investment outflows and recession fears could see Canada’s S&P/TSX Composite Index drop to 14,900 points next year, BMO said.
• Email: cmcclelland@postmedia.com
