2015 outlook for TSX a mixed bag at best

2014 was a roller coaster ride for investors in the Canadian market.

The S&P/TSX composite index climbed nearly 20 per cent during the first eight months of the year, reaching an all-time high of 15,685 in early September.

Less than six weeks later, the benchmark index was in correction territory, after falling 10 per cent amid worries about worsening global economic conditions in places such as Europe and China.

The TSX attempted a recovery, until the price of oil took it back down again, plummeting below $60 (U.S.) per barrel by mid December, down more than 40 per cent from mid summer.

Oil to create more headwinds

As anyone who has dared to check his or her investment portfolios lately knows, oil’s drop has taken a chunk out of the energy-heavy Canadian market.

Experts are forecasting the price of oil to remain low well into 2015, which threatens to take the wind out of the TSX’s sails for at least a few months.

Still, some market watchers believe the TSX will still see gains later in 2015, with the impact of lower oil prices being offset by increased demand for Canada’s non-energy exports, especially with the Canadian dollar trading down around 85 cents (U.S.)

Bruce Campbell, president and portfolio manager with Campbell, Lee & Ross Investment Management , is forecasting the TSX to climb to about 15,500 by the end of 2015, which is roughly a 10-per-cent increase from where it sat in mid December.

Campbell says the boost will come in part from the price of oil, which he expects to recover to around $80 (US) per barrel later in 2015.

“If energy is the best group, Canada and Australia will be the best markets,” he says.

Meantime, Campbell expects stocks in the consumer discretionary space to do well as people use money saved on gas towards food and entertainment.

A TD Bank report says lower gas prices are expected to save the average household about $300 in 2015. The bank also says lower oil prices could feed lower inflation, which will encourage the Bank of Canada to keep interest rates low.

John Stephenson, a portfolio manager at Stephenson & Co. Capital Management, is more pessimistic, believing the TSX will drop to around 13,300 around the middle of 2015, before bouncing back to around 14,400 by the end of next year.

“Not the most bullish forecast,” Stephenson says. “The good news in the story is that the U.S. is going to do just fine. The bad news is that Canada isn’t looking so great … It’s largely a story of commodities being challenged.”

That includes not just oil prices, which he expects to stay low, but the continued slump in the mining industry.

BMO Capital Markets chief investment strategist Brian Belski expects the TSX to be volatile again in 2015 and is forecasting the Canadian markets will underperform those in the U.S., given Canada’s reliance on commodities.

Still, he expects Canada to benefit from the strong growth anticipated in the U.S. next year, which should benefit financial and Industrial stocks on both sides of the border.

“The outlook for Canada was muddied by the decline in commodity prices however, on balance, our analysis suggests that any weakening in investment in the oil and gas industry will be offset by increased demand for Canada’s non- energy exports and commensurate investment by these industries,” says Belski, who is forecasting the TSX to hit 15,600 by the end of 2015.

Economy expected to pick up

Economists at the Royal Bank of Canada (RBC) also expect the Canadian economy to perform better next year, driven an increase in exports.

RBC says 2014 was a “turning point” for non-energy exports, which will continue in 2015, due in part to the lower Canadian dollar, which makes them more attractive to outsiders.

"On a national level, looking ahead to 2015 the net impact of lower oil prices will be negligible in terms of real GDP growth," says Craig Wright, RBC’s senior vice-president and chief economist in In its latest Economic and Financial Market Outlook.

It forecasts GDP growth of 2.5 per cent this year, 2.7 per cent in 2015 and 2.1 per cent in 2016.

RBC believes oil will average $70 per barrel next year, which will impact growth for oil-producing provinces such as Alberta, Saskatchewan and Newfoundland and Labrador.

Meantime, the potential for interest rate increases later next year could limit consumer spending, the bank says.

It expects consumer spending to increase by 2.4 per cent in 2015 and 2.2 per cent in 2016, which is down from the 2.8 per cent rise this year.