TSX poised for volatile 2014 with little growth

Canadian investors had an inferiority complex in 2013 and confidence isn’t expected to pick up this year, which experts predict will be a volatile one on the markets.

The benchmark S&P/TSX Composite Index grew a decent 10 per cent last year, but that performance was outdone by its American counterparts including the S&P 500, which lunged ahead 30 per cent, its best annual performance since 1997. The Dow Jones Industrial Average climbed 26.5 per cent, its best year since 1995, while the Nasdaq surged 38 per cent to its best showing since 2009.

While few are calling for the main U.S. index to keep up that same pace of growth in 2014, the TSX isn't expected to fare much better than it did last year.

Instead of counting on a particular country to drive returns, strategists are suggesting investors pick and choose particular sectors and companies poised for growth, or recovery.

“We enter 2014 less optimistic than we have been in the past few years,” BMO Nesbitt Burns analyst Brian Belski said in a recent note, predicting the S&P/TSX composite will close at 2014 at 13,575, near where it started.

“We continue to believe Canadian stocks lack discernible fundamentals and our models are flagging downside risks, not upside risk.”

Blame the depressed commodities sector for dragging down the TSX’s fortunes. The mining sector has been slammed by a drop in commodity prices including gold, which fell the most in three decades in 2013, to around US$1,200 per ounce, ending a decade-long bull run. Silver spun out too, as did prices of other industrial commodities such as copper and coal, due to slowing global economic growth, particularly in resource-dependent China.

But instead of dwelling on the negative, Belski suggests approaching the market as though it were “a stock-pickers environment.”

He favours bank stocks – despite what the short sellers say – and industrial companies such as the iconic Bombardier Inc. and Canadian National Railway Co.

It's going to be a bumpy ride

Investors should also reach for the Gravol.

Belski and others are predicting a roller-coaster year on the markets, especially as the U.S. Federal Reserve tapers its quantitative easing program.

That will add some uncertainty as markets try to figure out if the American economy is ready to function without the ongoing stimulus it has been receiving from the government to get back on track.

“Nonetheless, any Fed induced weakness should not be viewed as the end of this bull market,” Belski wrote. “Instead investors with slightly longer investment horizons should use it a buying opportunity, particularly considering that several secular trends suggest that there are many more years of life in this cycle.”

CIBC World Markets is calling 2014 the “Year of the taper,” and predicts it’ll be a risky one for investors.

“Matching last year’s over-30 per cent equity return stateside looks like a near-impossible feat,” economist Peter Buchanan said in a recent note. “But if policymakers there successfully manage a difficult transition and China avoids a hard landing, 2014 could end up being a decent year for North American stocks.”

Adrian Mastracci, portfolio manager at Vancouver-based KCM Wealth Management Inc., recommends investors avoid the headlines.

“Resist the urge to time the markets,” he says. "Don't pin your hopes on guessing whether the markets deliver or disappoint. You’re going to get both.”

As for predictions, Mastracci believes the TSX will rise and fall with the U.S. economy.

“If the U.S. economy delivers, the TSX could see up to a 10 per cent jump for the year,” he predicts. Or, it could go the opposite way if America’s economy stumbles.

For investors looking to rebalance their portfolio, Mastracci recommends buying a few “quality investments” on the dips, and sell stocks that no longer fit on the rallies, without naming any specific stocks.

“Investors will need patience. Lots of it,” he says.