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Why these fund managers see the TSX outperforming the S&P 500

People attend a market open ceremony for the Toronto Stock Exchange at the TSX Broadcast Centre in Toronto June 20, 2008.     REUTERS/Mark Blinch (CANADA)
BMO's Brian Belski and Wellington-Altus' Martin Pelletier expect the S&P/TSX Composite Index to outperform the S&P 500 because of its exposure to cyclicals. REUTERS/Mark Blinch (CANADA)

While many investors might be souring on stocks as markets face a number of significant headwinds such as recession risks and high inflation, at least two fund managers are putting money to work in the Canadian market and see the S&P/TSX Composite Index outperforming the S&P 500.

"While we certainly remain bullish heading into year-end, we do believe the issues facing the market are unlikely to dissipate in the near term, and as such we expect this higher volatility backdrop to persist over the coming months. However, we believe this does not mean investors should position portfolios more defensively," said Brian Belski, chief investment strategist at BMO Capital Markets, in a note to clients on Monday.

Belski is calling for the TSX to end 2022 at 24,000 points, suggesting meaningful upside to its current level of just above 18,000 points as of Monday. He sees the Canadian benchmark's heavier cyclical weighting giving it the upper hand over its U.S. counterpart.

He says investors should focus on stocks that offer stability, value and dividends – "three core characteristics of Canadian equities within global markets."

North American indices have come under intense selling pressure in recent months as investors ramp up their recession bets. A key volatility gauge remained elevated to touch its highest level since mid-June.

Year-to-date, the TSX has fallen roughly 13 per cent while the S&P 500 is down about 23 per cent, according to Yahoo Finance data.

"A bottom and a top are more of a process and you can never get the timing perfectly," said Martin Pelletier, a portfolio manager at Wellington-Altus Private Counsel, via phone on Monday.

However, he's been using these stock declines to add to positions. He adds that sometimes, investor emotions can get in the way of identifying good buying opportunities.

"There's a chance that you miss out on a recovery and when it does eventually happen – and it will happen – it may be a month, it may be six months, it may be a year. And so for those who are, especially younger investors, there's a lot of opportunities out there," he said.

Pelletier says he thinks the groundwork is being laid for the TSX to outperform the S&P 500 over the next decade because of Canada's exposure to resources, which are poised to do well amid a global commodities shortfall.

He acknowledges that oil will likely fall further in the near term, especially if a recession plays out, but adds that throughout his career, he's never seen an energy supply situation this "precarious."

American benchmark West Texas Intermediate has dropped from US$120 per barrel in June to trade below the US$80 mark, and energy stocks have suffered as a result – presenting an opportunity for investors, according to Pelletier.

"A lot of energy stocks are reflecting a US$40 to US$50 oil price and valuation and so having a little bit to add to your portfolio is not so bad. And then materials also look very interesting, and financials. The banks have pulled off, and there are a lot of worries about rising rates and their exposure to variable mortgages but, you know, all of these sectors have done a really good job at shoring up their balance sheet and protecting themselves in the event of a recession," he said.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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