TORONTO (Reuters) - Canadian stocks are expected to decline in the coming months after an early surge this year, then rebound by year-end to levels not touched since 2008 as prospects for global growth improve, 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 slipping from current levels to 14,150 at the mid-point of 2014. It is then expected to reach 14,500 by the end of the year, a gain of 6.4 percent from the end of 2013.
Having jumped 5 percent so far in 2014, the TSX is one of the strongest performers among major global benchmark indices.
It was trading near six-year highs this week, but investors could be in for a rocky ride with volatility fueled by factors ranging from slower emerging market growth to an escalation of geopolitical worries. In recent weeks, the market has reacted sharply to tensions flaring in Ukraine and signs of weakness in China’s economy.
Still, a clearer and improved outlook for global growth is expected to energize natural resource companies, which benefit as demand for commodities rises, and the broader Canadian market by extension.
Overall, investors are seen taking their cues from rising stability in economic and earnings growth.
“We think it is absolutely going to be about fundamentals,” said Paul Taylor, chief investment officer at BMO Asset Management. “We are looking for 2014 to be defined by a broadening of global growth beyond north America, with more regions sharing in the economic recovery.”
Earlier this year, the World Bank raised its outlook for global growth for the first time in three years.
Much of the recent rally has been driven by a robust display from gold-mining shares, whose fortunes turned around sharply after a disastrous 2013 as the price of bullion rebounded. The group is up about 31 percent this year.
Some investors say the recent gains could be a precursor to a market correction.
“We will at some point get a market pullback,” said Craig Fehr, a strategist at Edward Jones in St. Louis, Missouri. “Even if we do get a 10 percent correction, I don’t think it’s going to be enough to alter the overall trajectory of the market.”
“Risk appetite is going to ebb and flow,” he added. “There are a host of risk factors that are going to periodically jump into the fore and rattle the market a little bit.”
Despite their advances, stocks are largely seen more attractive than bonds, and share prices haven’t run ahead of earnings growth estimates.
The TSX is trading at a price-to-earnings ratio of 16.95, while the S&P 500 .SPX is trading at 17.76, according to Thomson Reuters data.
“Overall, on a valuation basis, the market doesn’t look terribly extended,” said Elvis Picardo, strategist and vice president of research at Global Securities in Vancouver.
“The most attractive valuations seem to be in the groups that were most beaten down last year,” he added, citing the energy and materials sectors.
“Investors basically have to take a leap of faith that this bull run can continue and that these groups that have been lagging will catch up before it is over,” he said.
But not all forecasters are bullish about the market’s outlook for the year.
“I‘m still not convinced that commodities such as oil and gold are going to have a good year,” said Allan Small, a senior investment advisor at HollisWealth. “They’re going to be flat at best, and that will hold back our index.”
Editing by Nick Zieminski