Outlook 2019: Experts are turning bullish on the ‘really undervalued’ TSX

After a year of fear trumping fundamentals, market experts are turning cautiously positive on the thoroughly thrashed S&P/TSX Composite Index in 2019.

Weak domestic oil prices, trade tension, a housing market slowdown, Brexit uncertainty, and global growth jitters were among the macro trends that saw strong earnings and robust economic data cast aside.

Canada’s benchmark index finished 2018 down more than 12 per cent, erasing the entirety of its gains since the beginning of 2015. Energy stocks and financials, together making up more than half of the TSX, declined 21.48 per cent and 12.61 per cent, respectively. The comparatively minuscule information technology (+12.54 per cent) and consumer staples (+0.58 per cent) sectors were the only components to end the year in the black.

“I have never seen the TSX so disappointing, so battered, so bruised,” Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management, told Yahoo Finance Canada. “We had good profits, good numbers from the Canadian banks, the telcos, you name it. They were all kicked to the curb.”

It won’t take much to rouse Canadian stocks from their slump, Schwartz predicts, given the recently dismal performance. He sees hope in signs the Bank of Canada and the U.S. Federal Reserve will pause on marching interest rates higher, as well as modestly improving commodity prices.

Everything won’t be roses in the near-term, he said, but it may be enough for sentiment to turn positive on the “really, really undervalued” TSX.

Darren Sissons, vice-president and partner at Campbell, Lee & Ross, sees a mood swing underway as well.

“I’m probably more optimistic now than I have been in about five years,” Sissons told Yahoo Finance Canada. “The only thing we are waiting for is a foundation, where the market basically stops. Once it stops going down, then we will be pushing capital into the market.”

He expects investors will wade into defensive names at first, like BCE Inc. (BCE.TO) and Rogers Communications Inc. (RCI-B.TO), until the volatility dies down. Canadians won’t stop paying their internet and cell phone bills if a trade war erupts between the U.S. and China, he figures.

Sissons and Schwartz are among several notable observers calling for Canadian stocks to start shining in 2019.

BMO Capital Markets chief investment strategist Brian Belski’s sees the TSX cresting above an all-time high of 18,000 points. In his 2019 market outlook, he called for strength in the communications services, energy and financials sectors, with a preference for large cap, high-quality brands with growing dividends.

“Canadian-centric investors seem fixated on triggers like business-friendly policy, oil spreads, global growth and foreign inflows before they choose to invest,” Belski said in late 2018. “We firmly believe the more investors focus on fundamental discipline and process while tuning out the rhetoric, the more they will likely be rewarded.”

Russell Investments director of investment strategies Shailesh Kshatriya sees the TSX climbing to 16,000 by year-end. Kshatriya noted that sentiment is improving and indicators signal modestly oversold conditions.

“We are slightly positive on Canadian equities, especially relative to U.S. equities, due to the sizeable valuation and yield advantage,” Kshatriya wrote. “As sentiment shifts away from the factors that have dominated returns in 2018, there could be some unlocking of the ‘trapped’ value. So long as oil prices cooperate.”

For Schwartz, that unrealized value lies in Canada’s big banks, which saw dismal returns in 2018, despite strong year-over-year profit growth and handsome dividends. He said it wouldn’t take much in the good news department to see bank stocks sweeten by 10 per cent in a heartbeat.

Canadian Banks are trading at their lowest valuation levels since January 2016 and have seen their biggest multiple compression since 2008. This on the back of 10% earnings growth in 2018.

— Barry Schwartz (@BarrySchwartzBW) January 6, 2019

“You can’t be offering me the banks for 10-times earnings when all they have done year-in, year-out is absolutely nail it in terms of profits, and show zero cracks,” Schwartz said. “I have no idea why Bank of Nova Scotia shouldn’t be at $75.”

Scotiabank (BNS.TO) shares climbed 0.28 per cent to $68.75 in Toronto at 1:27 p.m. E.T. on Monday.

Like Sissons, Schwartz is a fan of Canadian telcos Bell, Telus Corp. (T.TO) and Rogers as defensive portfolio anchors, alongside utilities and consumer staples. He said while the Canadian energy sector has probably overcorrected, he would not recommend an overweight allocation.

Sissons said European energy companies such as Royal Dutch Shell plc (RDS-A) and BP plc (BP) remain attractive relative to Canadian peers, given the lack of new pipelines and ongoing risks to the price of Canadian crude grades.

That said, he remains hopeful some manner of progress on adding pipeline capacity out of Alberta will be a tailwind for Canadian stocks in 2019.

“Even if it was a five-year process to dig and build, you would have people starting to make decisions five years out. There might be some investment committed to Canada,” Sissons said. “I think that would be a very, very good thing.”

With most of 2018’s market-rattling irritants having spilled into 2019, and Canada set to head into a federal election, Schwartz and Sissons agree the best medicine for the TSX is likely a stretch of peace and quiet that would allow fundamentals to steal centre stage, even for a brief stint.

“You get a couple good days in a row without any stupid tweets (from Trump) or companies (like Apple) saying their sales out of China plummeted, then you can really get that FOMO (fear of missing out) revving,” said Schwartz. “It won’t take much to change what is going on now.”

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