Yahoo Finance High-flying markets prompt bubble fears
Canada’s main stock index is trading near its all-time high set before the last big crash, while U.S. indexes continue to break records. That’s making a lot of investors a lot of money. It’s also making many people nervous.
Will history repeat itself, or is this vindication for all of that suffering over the past six years? It depends on whom you ask.
“Time brings change,” says CIBC World Markets economist Peter Buchanan in a recent note. “While prices have fully recouped one of the worst sell-offs on record, today’s market isn’t identical to the one of six years ago.”
Buchanan argues the financial and industrial sectors have more weight on the S&P/TSX Composite Index today, and they’re more stable industries. What’s more, he says the TSX is simply catching up after lagging other markets in 2013.
The TSX is up about 11 per cent so far this year and 27 per cent over the past 12 months, making it one of the best-performing markets around the world including the U.S., the United Kingdom and the MSCI Emerging Markets Index.
Does the TSX have the stamina to keep moving ahead?
Buchanan thinks so. Rising energy prices have helped, alongside growth in the financial and industrial sectors.
“While the current backdrop is not without challenges, the TSX still has a number of factors working in its favour,” he says. “Those and some general forces favouring equities paint a constructive picture, looking ahead … There are reasons for thinking that the final whistle hasn’t blown on the rally.”
Bubble brewing?
Others see Canada’s market as becoming overheated and caution investors about becoming too complacent.
“With stock valuations now close to historical norms, the case for similar equity price gains going forward have diminished,” said Capital Economics economist David Madani.
He says the energy rally in particular is “overdone,” which will weigh on the overall market.
Still, Madani believes the TSX could gain ground in other sectors and calls for “only modest growth” of about 5 per cent for the TSX main index over the next 12 months.
How Canada’s market performs will depend in part on how it grows, and reviews there are also mixed. Madani is calling for Canada’s economy to grow 2 per cent this year, but then slip to 1.5 per cent in 2015.
TD Bank is more optimistic. While Canada’s economy started off slow this year (blame the weather), TD economists say it will pick up next year, spurred by low interest rates, a lower dollar and a strong U.S. economy.
In a recent report, TD economists forecast the economy will grow 2.2 per cent this year and 2.6 per cent next year, with businesses finally picking up some of the slack.
“Once businesses have greater confidence in firming demand, business investment is expected to emerge from its current slump,” the bank says. “Strong corporate balance sheets, profits, and an accommodative interest rate and exchange rate environment should also enable stronger capital expenditures.”
In a report released Tuesday, the bank cites six reasons why capital investment will pick up, which they call “a welcome development” in the economy. They include:
A stronger U.S. economy (We can’t deny the economic dependence we have on our neighbours to the south)
Rebound in corporate profits (TD says corporate profits grew by more than 25 per cent at annualized rates in the first quarter of 2014)
Solid corporate balance sheets (TD says the ratio of financial assets to financial liabilities have settled at a new level since the recent recession)
Spare capacity is shrinking (Canadian companies will have little choice but to invest)
Accommodative monetary policy (Low interest rates to spur spending)
Companies are optimistic (If the markets keep climbing, that’s a good bet)
