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TORONTO (Reuters) - After beating Wall Street in the previous decade, Canadian stocks look set to lag for the second straight year in 2012, as relentless headwinds overseas drag on the Toronto Stock Exchange's hefty resource sector.
Canada's famously conservative banks and other financial stocks, which account for about a third of the market, could also be a liability, with some forecasting a bigger rise in U.S. banks on the back of an improving economy there.
While the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE has so far beaten market expectations for 2012 - nearing 12,800 points last month - it is still nearly 12 percent below its 2011 high around 14,300. <EPOLL/CA>
By contrast, the S&P 500 .SPX has reached its highest levels since the collapse of Lehman Brothers in 2008, and there is talk of further gains.
George Vasic, equity strategist and chief economist for UBS Securities Canada, said Toronto's three biggest obstacles could be its safe-haven gold stocks, banks that will not do as well in a run-up as their U.S. counterparts and energy prices that are already high.
"You have probably half the TSX right there not in the best shape," he said.
The S&P 500 has outperformed the TSX by 15 percentage points since the beginning of 2010 to the end of February 2012, and more than double that since the market rebound in March 2009.
S&P 500 vs. TSX Composite since early 2011:
Before then, a surge in commodities - and the Canadian dollar - saw the TSX take a dramatic lead for much of the previous 10 years.
"What drives the TSX is ultimately the outlook for global growth. And when you have so many concerns like we did from August of last year that's going to take its toll," said Elvis Picardo, vice-president of research at Global Securities in Vancouver.
"As those concerns subside we should be in a position to catch up."
The S&P 500, the main barometer for U.S. equities, has benefited from signs the hard hit U.S. economy is picking up. The index is also helped by its wider exposure to the technology, healthcare and consumer-focused sectors.
By contrast, energy, mining and other resource companies make up about half the value of the TSX composite, with major names including Suncor Energy Inc (SU.TO), Barrick Gold Corp (ABX.TO), Potash Corp (POT.TO) and Teck Resources Ltd TCKb.TO.
Mining stocks like Potash and Teck are especially vulnerable to worries about economic slowdowns in Europe and Asia, and geo-political turmoil in the Middle East.
William Horton, chief investment officer at MD Physician Services, which manages more than C$21 billion ($21.2 billion) in assets, is currently underweight Canadian stocks versus U.S. and international equities, a reversal of the investment firm's usual strategy.
He said that, in time, Canadian resource companies will benefit from the stronger growth expected in emerging economies compared with developed markets. But for now, investors are more focused on policymakers' efforts to contain Europe's debt crisis.
"Is Canada positioned to link to this two-speed economy? The answer is, long term, absolutely. But short-term, investors are less certain about whether this two-speed global growth construct is going to play out," Horton said.
Not all investors think Toronto's Bay Street will lag Wall Street in 2012. Some say technical analysis, the study of chart movements, suggests the Canadian index will perform well this year and next.
"Because of our heavy exposure to commodities, stocks have been correcting significantly," said Sid Mokhtari, market technician and director of institutional equity research at CIBC World Markets.
"But they have established a low and they are slowly establishing positive trend structures ... if that's the case, then Canada is going to be able to do well."
The U.S. election will also provide important direction, Mokhtari said. He said a study of the market's performance during election years since 1952 shows that Canadian equities should perform as well as U.S. stocks in 2012 and outperform them next year.
(Editing by Jeffrey Hodgson and Rob Wilson)
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