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Money managers bullish on Canadian stocks as TSX closes at new record

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Jessy Bains
·3 min read
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A sign board displaying Toronto Stock Exchange (TSX) stock information is seen in Toronto June 23, 2014. Canada's main stock index was little changed on Monday as weakness in financial and energy shares offset gains in the materials sector.   REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)
A sign board displaying Toronto Stock Exchange (TSX) (Reuters)

A day after rioters stormed the Capitol building in Washington D.C., Canada’s main stock index followed U.S. stocks into record territory, closing above its previous record high set on February 20th, 2020 to 18,027.

Despite a 60 per cent bounce off its 2020 lows, the S&P/TSX (^GSPTSE) took longer than the S&P 500 to return to and surpass all-time highs, but money managers think there’s room to run in 2021.

“We’re quite bullish on our outlook for the S&P/TSX this year. We especially like it for its strong weighting to the underperforming value segments of the market including financials and energy,” Martin Pelletier, portfolio manager at Wellington-Altus Private Counsel, told Yahoo Finance Canada.

“We think these sectors will do very well on the global reflation trade should economies respond to the pent-up demand from record high household savings pared with record setting fiscal stimulus plans.”

A powerful rally for tech stocks helped propel the S&P 500 to a 16 per cent gain in 2020. The NASDAQ, which has an even higher tech weighting, jumped 43 per cent for its biggest gain since 2009. The TSX was up a more modest 2 per cent.

The TSX lagging U.S. benchmarks (Yahoo Finance Canada)
The TSX lagging U.S. benchmarks (Yahoo Finance Canada)

Besides Shopify (SHOP.TO), and a handful of lesser known tech companies, far fewer tech companies are included in the S&P/TSX Composite Index than it’s American peers, which is a big reason for the underperformance but also why it could be Canada’s time to shine.

Pelletier says Canada’s financials and energy stand to benefit from a rotation out of tech on profit taking and what he sees as stretched valuations. He is, however, keeping a close eye on the loonie (CADUSD=X), which has been climbing against a falling greenback.

“Longer-term we do have some concerns about the Canadian dollar though, given the amount of debt among corporations, households and provincial and federal governments, and so some caution is warranted.” he said.

Expect volatility

Stan Wong, portfolio manager at Scotia Wealth Management, is optimistic about North American equities and expects a high single-digit return for the TSX. But surging COVID-19 cases and vaccine rollout delays mean it won’t be smooth sailing.

“The rollout of COVID-19 vaccines will allow for the reopening of the global economy and the normalization of business activity – which in turn should provide equities with a path towards solid returns in 2021,” he told Yahoo Finance Canada.

“However, it is likely that these returns will be met with volatility given the risks of near-term virus caseloads being higher than anticipated and logistical issues surrounding the distribution of vaccines.”

Tech, materials, and consumer discretionary sectors led the way in 2021. Going forward, Wong says financial and communication services are attractive sectors for their reasonable valuations and healthy dividends.

Looking outside of Canada

Kurt Reiman, BlackRock’s chief investment strategist for Canada, also thinks Canadian stocks have room to run in 2021.

“We entered 2021 with a pro-risk stance and an overweight to global equities, supported by expected monetary and fiscal policy support, generationally low interest rates and an economy that will likely reopen further as the coronavirus vaccine is deployed,” he told Yahoo Finance Canada.

But Reiman says financials and energy, Canada’s dominant sectors, face structural headwinds. So he favours global stocks.

“We prefer the U.S. and emerging market equities for their above-average exposure to sectors that deliver a high return on equity and have strong secular growth drivers, such as healthcare and technology.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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