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TORONTO (Reuters) - The Canadian stock market may deliver its best performance in four years in 2014 as a global economic recovery gathers steam, driving up sagging commodity prices and natural resource shares, a Reuters poll found.
The median forecast in a poll of 40 market analysts taken in the past week showed the benchmark Toronto Stock Exchange's S&P/TSX composite index .GSPTSE gaining over 9 percent from current levels to reach 14,363 by the end of next year.
The index is forecast at 13,650 in mid-2014.
While investors in Canadian equities have been largely left out of the global stock market party of 2013 - the TSX's 5.6 percent growth this year compares with the S&P 500's 25 percent - many strategists see a rebound in sentiment.
With Europe pulling itself out of a recession, China showing signs of stabilizing, Japan feeling positive effects of a record stimulus and the U.S. economy entering higher gear, analysts expect the global demand outlook to brighten. And the export-focused Canadian market is seen a beneficiary.
"It's the first time since 2011 that all the major economic blocs are going to be in a growth mode," said Elvis Picardo, strategist at Global Securities.
He noted significant contributions from the heavyweight financial, energy and material sectors will be required to take the index higher: "The expectation is that all three of those groups will contribute nicely to earnings growth next year."
Their performance this year has been mixed. Material stocks are down 34 percent in 2013 to date, the energy group is up 8 percent, and financials have run up almost 20 percent.
Investors realize that some of the dire predictions made for the Canadian banks have not played out, strategists said.
"(Investors) recognize you still have problems with slowing loan growth, slim margins and housing issues," said Bob Gorman, chief portfolio strategist at TD Wealth.
"But banks have shown themselves able to generate modest to above-expectations earnings growth."
Despite concerns that Canadian consumer lending would slow due to a cooling housing market and more frugal consumers, lending has continued to churn higher, driving most major Canadian banks to record profits in 2013.
Gorman expects growth from financials and a rebound in resources to help the TSX perform in sync with the U.S. market.
"You're going to have a convergence of returns in the North American market," he said. "2014 will not be a bad year, not a blockbuster, but far better than fixed income."
After climbing over 14 percent in 2010, the index dropped in 2011 and edged higher in 2012.
The Canadian benchmark index's gains have been crimped in recent years by a sluggish performance in natural resources and weak demand for commodities.
But the dramatic drop in the material sector and gold-mining stocks, which have lost half their value this year, has made investors wonder if prices have reached a point where they deserve a second look.
"You need to pick your spots, but I would say there's better opportunity now in resources than there has been in several years," Gorman said.
While a better global macroeconomic backdrop will lift all boats, the resource groups could be the big winners.
"It's going to be a much more positive environment for resources," said Craig Fehr, a strategist at Edward Jones. "Improving global demand is really the story for 2014."
"As we start to see the prospects for better growth internationally, that should not only support commodity prices but also the demand picture, which means that production has a brighter outlook within Canada."
An event investors will be watching closely, one that could well be the elephant in the room next year, is an expected move by the U.S. Federal Reserve to scale back its monetary stimulus.
As the Fed steps back from the extraordinary measures that saw the central bank inject trillions of dollars into the U.S. economy, investors will have to set themselves up for a higher rate environment.
Given this, not everyone polled offered a bullish view.
Matt Skipp, president of SW8 Asset Management, sees a fallout from the Fed's expected stimulus rollback, especially if it is not followed by a robust U.S. economic recovery.
"The removal of some of this liquidity that has fueled most of this rally might (result in) a natural pullback in equities," said Skipp, who sees the TSX slipping to 12,436 by the end of 2014.
"If there's no significant U.S. recovery, Canada - with its banks at record highs, real estate at record highs, consumer debt at record highs - looks vulnerable."
Indeed, Thomson Reuters data showed the index is currently trading at a 12-month forward price-to-earnings ratio of 14.12, higher than the 5- and 10-year average, suggesting Canadian stocks are relatively expensive.
Additional reporting by Cameron French; Additional polling by Hari Kishan; Editing by Chizu Nomiyama