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Canadian stocks set to outperform U.S. shares in 2019: Manulife

“Frustratingly disappointing.”

That’s the phrase Manulife Investments’ chief investment strategist musters to describe the S&P/TSX Composite Index as he looks back on a year where global risk seemed to conspire against Canadian stocks.

Now, in 2019, “attractive,” “rebound,” and “meaningfully better” are the descriptors Philip Petursson is using. He’s calling for the TSX to climb to an all-time high of 17,000 points by the end of this year, and discounted Canadian stocks to outperform U.S.-listed peers.

“It’s not that U.S. stocks are expensive. It’s just that on a relative basis, Canadian stocks are even cheaper,” Petursson told Yahoo Finance Canada in an interview. “We are set up for a very, very nice rally once we remove these clouds of uncertainty . . . that are causing investors to question what the future trade looks like in the near term.”

Strength in energy and financials, together more than half of Canada’s benchmark index, and two key laggards last year, will be the theme for 2019, he predicts.

Meanwhile, worries of a U.S.-China trade war, fears of slowing global growth, and a plethora of other risks from beyond Canada’s borders have showed signs of abating in the minds of investors during the first weeks of 2019, Petursson said.

The Bank of Canada, which held its key rate at 1.75 per cent on Wednesday, appears increasingly content to hold off on rushing towards its neutral range in the near-term. That’s a plus for the bank-heavy TSX, which saw financials decline 12.61 per cent last year in the face of broad-based fundamental strength.

“I don’t think the Bank of Canada can be in a hurry to raise rates, even though I think they want to,” Petursson said. “If the Bank of Canada raises, it will be once. But I also believe that they will have to walk that back fairly quickly.”

‘Can’t get worse from here’

The price for Canadian heavy crude, a leading TSX indicator, has improved dramatically since the plunge that shocked Canada’s energy sector in the latter part of 2018. Petursson also sees the U.S. benchmark West Texas Intermediate grade rebounding to the US$60 to $70 per barrel range.

He said even scant signs of stronger prices will be a meaningful tailwind for the depressed TSX energy component, which plunged 21.48 per cent last year.

“It almost seems that the energy sector can’t get worse from here, unless you believe that oil prices are going to $30. In which case, that seems to be already priced in,” said Petursson. “We’re already at the worst case scenario.”

His hope is for band-aid solutions, such as Alberta Premier Rachel Notley’s government-imposed production cut and plan for more rail cars, to continue easing the supply glut that has depressed oil prices and energy shares in the absence of new pipelines.

“The federal government certainly has intentions to further along pipelines and increase capacity, but it’s not going to come in 2019,” Petursson said. “Everyone needs to come in-line that this is the best solution for our country and economy.”

Taken on the whole, he sees the headwinds battering the TSX as temporary, and perhaps most notably, absent on Canadian balance sheets.

“The fundamentals are attractive, and we haven’t seen breakdowns. We’re not seeing a lot of economic stress out there that hasn’t been caused by this trade uncertainty,” Petursson said. “A lot of this can be reversed very quickly, while the business fundamentals remain intact. I think investors will be well rewarded for their patients through this correction.”

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