Canadian stocks are likely to outperform American stocks in 2014, finds a new report from CIBC World Markets.
The bank’s economists expect 2014 to be the first year since 2010 in which global growth surprises on the upside. They predict that growth will run at 4%, about a half-point above current consensus or International Monetary Fund expectations.
Historically, years in which global growth ran at 4% or better were big winners for the cyclically weighted S&P/TSX Composite Index, producing median returns well above the S&P 500.
CIBC chief economist Avery Shenfeld notes that the S&P/TSX has outperformed the S&P 500 in each of the last six years in which global growth has topped 4% and 2014 should add to that streak.
“That reflects the heavier weighting in Toronto’s benchmark towards resources sensitive to global activity,” he says. “To this point, sluggish activity has held back demand, in a period in which supply was expanding in such areas as natural gas, oil and base metals. Little wonder, then, that the resource sector has been largely responsible for a disappointing earnings recovery of late, offsetting steady gains elsewhere in the index.”
The report calls for the S&P/TSX Composite Index’s earnings growth to run a consensus-topping 13% in 2014. It also predicts that the S&P 500 will roughly match bottom-up earnings expectations with growth of about 7.5%.
Shenfeld notes that forward price-to-earnings multiples also seem favourable to a year in which Canada lands on top.
While he is calling for Canadian stocks to perform to the upside, he expects some of that advantage could be eroded by a further slide in the Canadian dollar in the near term.
“For now, Canadian asset managers will want to keep some of the U.S. dollar exposure they’ve built up, perhaps doing so on the fixed income side,” Shenfeld explains. “We’ll need to see more improvement in Canada’s trade position as the year progresses, and an uptick in inflation that quells dovish talk from the Bank of Canada, to put a floor under the loonie.”