The crude sector, which has so far been battered this year, still has the potential to go higher price-wise
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by Kristine Owram
Canadian stocks ranked 21st among the world’s developed markets in the first quarter, an ignominious performance that investors don’t expect to improve much for the rest of the year -- unless oil bolts higher again.
Strategists and portfolio managers are betting the S&P/TSX Composite Index will only rise about 3.3% to 16,066 by the end of 2017 from Friday’s close, according to the average of eight forecasts compiled by Bloomberg News. The full-year forecast gain of 5% contrasts with the benchmark’s 18% return in 2016.
"Last year’s strong returns were really driven by a combination of multiple expansion and the rebound in energy, neither of which we’re likely to experience in 2017," said Craig Jerusalim, who manages $4.5 billion (US$3.4 billion) in Canadian equities at CIBC Asset Management.
Canada’s benchmark stock index eked out a gain of 1.7% in the first quarter, putting it ahead of only Norway, Japan and Israel. By contrast, the S&P 500 rose 5.5% and the top performer, Spain’s Ibex 35, added 12%. Still, the paltry rise was enough to give the TSX its fifth-straight quarterly advance, its longest streak of gains since 2007.
The obvious culprit for the TSX’s underperformance this year -- and outperformance last year -- is oil. The price of West Texas Intermediate crude has fallen 10% from its high of US$56.37 on Jan. 6, dragging the energy index down 6.2% year-to-date. With energy companies accounting for 21% of the S&P/TSX, the decline in those shares dwarfs any impact from the so-called Trump rally that has been driving US stocks.
Jerusalim said he sees crude range-bound in the low US$40s to the low US$50s this year, implying little upside from current levels. This means investors should place more importance on the characteristics of individual stocks and less importance on the macro picture, he said.
"The fundamentals matter now more than they have in the past when the easy money was made from that multiple expansion," Jerusalim said.
He recommends investors look for companies that can create value while others retrench, such as Brookfield Asset Management Inc.; companies with strong balance sheets like Granite Real Estate Investment Trust; and off-benchmark companies like Trilogy International Partners Inc. and Shopify Inc.
One of the reasons for oil’s weakness this year is growing US stockpiles, which quashed last year’s optimism that OPEC supply cuts would bring the market back into balance. The global-inventory picture will start to improve by mid- to late 2017, boosting the price of oil and the S&P/TSX along with it, said Matt Barasch, Canadian equity strategist at RBC Capital Markets.
"The market is hyper-focused on US inventories, which no doubt are at extremely elevated levels, but in our view that misses the forest for the trees," Barasch said in a phone interview. His year-end target for the TSX is 16,300, up 5% from here. "Global supplies still remain challenged and global demand continues to push higher."
As a result, Barasch recommends investors consider Canadian energy stocks as well as Canadian banks, which deserve higher multiples than they typically get, he said.
"The secret sauce to TSX performance has been getting that oil price to gradually push higher," said Barasch, "We still think 2017 has that potential."
There are other factors that could drive the TSX higher besides oil prices, said Patrick Blais, senior portfolio manager at Manulife Asset Management. Monetary policy remains accommodative and central banks are being "extremely careful" about reducing liquidity; stock valuations are not excessive, particularly if you strip out the oil sector; and the global economy is in the midst of a synchronized rebound.
"It may not be outstanding and it may be below the trend rate that we were used to before the financial crisis, but it’s one of the first times where it’s actually been synchronized," said Blais, who manages $6.1 billion for Manulife. "I think Canada will benefit from it and will get the extra kicker of a rebound in the oil price."
Blais is moving away from cyclicals, which he believes are getting expensive, and adding to his position in names with more attractive valuations like Uni-Select Inc., CGI Group Inc., Quebecor Inc. and Loblaw Cos. Ltd.
Year-to-date, the top performing stocks on the TSX include Ivanhoe Mines Ltd., up 83%, and Sierra Wireless Inc., up 68%. The worst performers are, not surprisingly, energy producers, with Crew Energy Inc. down 34% and Baytex Energy Corp. down 31%.
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Daily Wrap-Up: Energy sector drags TSX lower on Cenovus deal
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Canadian stocks ranked 21st among the world’s developed markets in the first quarter, an ignominious performance that investors don’t expect to improve much for the rest of the year -- unless oil bolts higher again.
Strategists and portfolio managers are betting the S&P/TSX Composite Index will only rise about 3.3% to 16,066 by the end of 2017 from Friday’s close, according to the average of eight forecasts compiled by Bloomberg News. The full-year forecast gain of 5% contrasts with the benchmark’s 18% return in 2016.
"Last year’s strong returns were really driven by a combination of multiple expansion and the rebound in energy, neither of which we’re likely to experience in 2017," said Craig Jerusalim, who manages $4.5 billion (US$3.4 billion) in Canadian equities at CIBC Asset Management.
Canada’s benchmark stock index eked out a gain of 1.7% in the first quarter, putting it ahead of only Norway, Japan and Israel. By contrast, the S&P 500 rose 5.5% and the top performer, Spain’s Ibex 35, added 12%. Still, the paltry rise was enough to give the TSX its fifth-straight quarterly advance, its longest streak of gains since 2007.
The obvious culprit for the TSX’s underperformance this year -- and outperformance last year -- is oil. The price of West Texas Intermediate crude has fallen 10% from its high of US$56.37 on Jan. 6, dragging the energy index down 6.2% year-to-date. With energy companies accounting for 21% of the S&P/TSX, the decline in those shares dwarfs any impact from the so-called Trump rally that has been driving US stocks.
Jerusalim said he sees crude range-bound in the low US$40s to the low US$50s this year, implying little upside from current levels. This means investors should place more importance on the characteristics of individual stocks and less importance on the macro picture, he said.
"The fundamentals matter now more than they have in the past when the easy money was made from that multiple expansion," Jerusalim said.
He recommends investors look for companies that can create value while others retrench, such as Brookfield Asset Management Inc.; companies with strong balance sheets like Granite Real Estate Investment Trust; and off-benchmark companies like Trilogy International Partners Inc. and Shopify Inc.
One of the reasons for oil’s weakness this year is growing US stockpiles, which quashed last year’s optimism that OPEC supply cuts would bring the market back into balance. The global-inventory picture will start to improve by mid- to late 2017, boosting the price of oil and the S&P/TSX along with it, said Matt Barasch, Canadian equity strategist at RBC Capital Markets.
"The market is hyper-focused on US inventories, which no doubt are at extremely elevated levels, but in our view that misses the forest for the trees," Barasch said in a phone interview. His year-end target for the TSX is 16,300, up 5% from here. "Global supplies still remain challenged and global demand continues to push higher."
As a result, Barasch recommends investors consider Canadian energy stocks as well as Canadian banks, which deserve higher multiples than they typically get, he said.
"The secret sauce to TSX performance has been getting that oil price to gradually push higher," said Barasch, "We still think 2017 has that potential."
There are other factors that could drive the TSX higher besides oil prices, said Patrick Blais, senior portfolio manager at Manulife Asset Management. Monetary policy remains accommodative and central banks are being "extremely careful" about reducing liquidity; stock valuations are not excessive, particularly if you strip out the oil sector; and the global economy is in the midst of a synchronized rebound.
"It may not be outstanding and it may be below the trend rate that we were used to before the financial crisis, but it’s one of the first times where it’s actually been synchronized," said Blais, who manages $6.1 billion for Manulife. "I think Canada will benefit from it and will get the extra kicker of a rebound in the oil price."
Blais is moving away from cyclicals, which he believes are getting expensive, and adding to his position in names with more attractive valuations like Uni-Select Inc., CGI Group Inc., Quebecor Inc. and Loblaw Cos. Ltd.
Year-to-date, the top performing stocks on the TSX include Ivanhoe Mines Ltd., up 83%, and Sierra Wireless Inc., up 68%. The worst performers are, not surprisingly, energy producers, with Crew Energy Inc. down 34% and Baytex Energy Corp. down 31%.
Related stories:
Daily Wrap-Up: Energy sector drags TSX lower on Cenovus deal
Decision made on controversial Canadian pipeline
