Why the TSX is on the climb

Talk remains positive for TSX stocks.

“Canadian growth is hot, and analysts are pricing strong earnings growth for the TSX over the coming three years,” says Nick Exarhos, director at CIBC World Markets, in a weekly economics report.

Read: Global growth makes way for equities exposure

Likewise, “The TSX has sprung back to life,” says Robert Kavcic, senior economist at BMO Capital Markets, in a weekly equities report. The index has increased almost 6% since mid-August, outperforming most of its major market peers, he notes.

“The composite is expected to outpace European stocks and names on the S&P through 2020, a catalyst that should help reverse some of the underperformance we’ve experienced on the composite so far this year,” adds Exarhos.

No single factor or sector can take credit for the positive performance, says Kavcic. “Oil prices have helped a bit, and banks have probably benefited from the rate environment, but every sector on the TSX is up over that period [since mid-August],” he says.

Maybe the market realizes Canadian equities are too cheap. “TSX valuations relative to the S&P 500, based on forward earnings yields, were the most attractive in almost a decade this summer,” Kavcic says.

Speaking generally about strong-performing global stock markets, Fotios Raptis, TD senior economist, says in a weekly economics report, “Perhaps with low interest rates stimulating investor risk appetite, this [positive performance] should be expected, but one can’t help but wonder what may happen to asset prices as global interest rates rise further off extraordinary low levels.”

While above-trend economic growth in the U.S. and other regions helps support asset prices, there are risks to global recovery, as pointed out last week by the IMF, says Raptis, who adds that the U.S. inflation report for September was disappointing.

“An unforeseen shock can easily derail the recovery, sending risk asset prices down with it,” he says.

Bonds

After the recent increase in Canadian yields, “the market is now re-pricing a less aggressive Bank of Canada,” says Exarhos.

He expects yield spread risk versus the U.S. to become more negative — “something that has us favouring yield-sensitive Canadian sectors against their American peers.”

That’s because Canada’s fiscal backdrop is set to improve, he explains, while the tax plan stateside, expected to benefit companies’ bottom lines, will also increase companies’ deficits.

Read: Why markets should scrutinize U.S. tax proposal

Further, “renewed signs of wage pressures in the U.S. will cause the market to price more inflation into the American curve — a dynamic that isn’t present in the Canadian figures.”

The result: TSX utilities and the real estate sector could reverse their relative underperformance of late.

Read: Weak Canadian equities make case for active management

Read the full reports from CIBC, BMO and TD.

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