Canada’s stock market is up 22% in 2021, but investors are betting on more gains as they sell volatile growth stocks. The SandP/TSX Composite Index is trading near its lowest on record compared to the SandP 500 Global Stock Market Crash. This is proving to be a catalyst for gains, particularly as the threat of interest rate hikes and rising commodity prices benefit the high-quality national equity benchmark. The Tokyo Stock Exchange price index is known for its low multiples. In contrast, after years of gains for tech stocks, the high-growth SandP 500 Index is trading at 20.1 times future earnings.
Canadian equities remain a strong relative value play within global markets, with 2022 likely positioned to see expanded reopening of the economy that should result in another year of record earnings and one of the strongest dividend growth cycles in decades,” Bank of Montreal Chief Investment Strategist Brian Belski said in a note.
He expects SandP/TSX to rally to 24,000 by the end of the year, which would mark another all-time high.
Global benchmark indices fell for the first month of the year, but the TSX avoided major losses. Value stocks support the Canadian market, with financials and energy making up half of the index. Foreign investors have already started to turn. Global investors bought CAD$30.1 billion worth of Canadian securities in November, the largest investment since April 2020, according to a study by BMO Capital Markets. While market strategists expect wage increases and rising interest rates to squeeze profit margins this year, say they also predicted that Canadian value stocks could continue to deliver better-than-expected results. The country’s benchmark stock index rose 1% on Friday to end the week up 0.6%.
Canadian National Railway Co.launched earnings season with an expectationbeating fourth quarter even after one of North America’s largest railroads contended with floods, frost and grain shortages a sign that Canada’s economy strengthened in the wake of strict Covid19 restrictions.The result could be a harbinger for what’s to come.Scotiabank market strategist Hugo SteMarie expects fourth quarter earnings per share from companies in the TSX to hit a new high as a bulk of the companies benefit from an improving economy.
“A healthy labor market, soaring commodity prices and resilient profit margins could argue for a beat,” Ste-Marie said in a note to clients, adding that pent-up demand trumps supply challenges and inflationary pressures.
The Bank of Canada and the US Federal Reserve signaled on Wednesday that they could tighten monetary policy from March. The big six banks, which make up almost a quarter of the TSX, would benefit the most.
We’re looking at stronger than expected earnings in the financials and energy sectors that benefit in this environment,” Fiera Capital vice president and portfolio manager Candice Bangsund said in an interview. “I would expect positive surprises on those fronts given the sharp revival in economic growth and the rally in the commodities space.”