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Toronto equity forecasts reduced as downside risks lurk - Reuters poll

A sign board displaying Toronto Stock Exchange stock information is seen in Toronto

By Fergal Smith

TORONTO (Reuters) - Canada's commodity-linked main stock index is expected to rise less than previously expected over coming months and could see a correction as investors grapple with a slowdown in China and higher borrowing costs, a Reuters poll found.

The median prediction of 24 portfolio managers and strategists in the August 9-21 poll was for the S&P/TSX Composite Index to advance 3.5% to 20,479 by year-end, compared with 21,000 expected in a previous poll in May.

It was then expected to climb to 21,800 by end-2024, stopping short of the record closing high it set in March last year of 22,087.22.

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"Our baseline economic forecast incorporates a significant slowdown of the global economy and a recession in Canada at the turn of the year," said Lorenzo Tessier Moreau, a senior economist at Desjardins.

"Key interest rates and most of the yield curve will also remain relatively high for the better part of 2023, which should weigh on stock markets."

The yield on Canada's 5-year notes has climbed in recent days to a 16-year high at 4.165% as investors bet major central banks, including the Bank of Canada, will hold interest rates at elevated levels for longer than previously thought.

Toronto's market has advanced 2.1% since the start of the year, which is well below a gain of 14.6% for the S&P 500.

The U.S. benchmark has benefited from a heavy weighting in high-flying technology shares. In contrast, resource and financial shares dominate the Toronto market, accounting for 31% and 29% respectively.

"Downside risks to China's growth trajectory could pressure commodity prices and resource sectors in the near term," said Angelo Kourkafas, an investment strategist at Edward Jones.

"However, the improvement in inflation, a resilient labour market, and expectations for an end to the BoC's rate-hiking cycle have moved us away from any worst-case scenarios."

China's economic recovery has lost steam in recent months due to a worsening property slump, weak consumer spending and tumbling credit growth.

Nine of 12 analysts who answered an additional question said a correction for the TSX is likely or highly likely by the end of 2023.

A correction is often seen as a pullback of 10% from the most recent peak. From its peak in January, the TSX is down over 4%.

"There are far too many headwinds for the equity markets in the near term," said Matt Skipp, president of SW8 Asset Management.

In addition to high interest rates and a slowdown in China, headwinds for the market include waning fiscal stimulus and the end of pent-up demand for travel and entertainment caused by the COVID-19 pandemic, Skipp said.

(Other stories from the Reuters global stock markets poll package:)

(Reporting by Fergal Smith; additional polling by Prerana Bhat, Pranoy Krishna and Rahul Trivedi; Editing by Simon Cameron-Moore)