October 5, 2017 / 5:45 AM / in a month

Canada's TSX to hit record high by year-end as growth picks up: Reuters poll

TORONTO (Reuters) - Canada’s main stock index will add to its third-quarter gains to set a record high by the end of the year, a Reuters poll found, as a pick-up in global activity boosts resource shares and other growth-sensitive sectors.

FILE PHOTO: Businessmen pass the Toronto Stock Exchange sing in Toronto, Ontario, Canada July 6, 2017. REUTERS/Chris Helgren

The median forecast from the poll of 29 portfolio managers and strategists was for the Toronto S&P/TSX composite index .GSPTSE to rise nearly 2 percent to 16,000 by the end of 2017 from Tuesday’s close of 15,728.51.

Further gains are expected to lift the Toronto market, which set a record of 15,943.09 in February, to 16,500 by the middle of 2018 and to 16,750 by the end of next year.

“We believe that Canadian equity markets are currently undervalued across sectors,” said Luc Vallée, chief strategist at Laurentian Bank Securities. “Global growth is picking up and commodity prices should benefit.”

The index has gained just 2.9 percent this year, trailing many other major markets, after climbing 17.5 percent in 2016. But it posted a 3 percent gain in the third quarter as higher oil prices boosted energy shares.

“Resources are turning, energy is now leading the market, and financials are playing catch-up,” said Mike Archibald, associate portfolio manager at AGF Investments.

Combined, energy and financials account for more than 50 percent of the weight of the index.

Financials had been pressured this year by investor concerns about a slowdown in the country’s housing market.

But higher bond yields have given the sector a boost after the Bank of Canada raised interest rates in July, for the first time in nearly seven years, and then again in September. The rate hikes came after the domestic economy expanded at an annualized 4.5 percent pace in the second quarter.

Higher bond yields tend to reduce the value of insurance companies’ liabilities and increase net interest margins of banks.

Archibald expects Canada’s cyclical sectors such as energy, metals, industrial, consumer discretionary and financials to outperform as investors grow more confident about prospects for global growth and as inflation surpasses expectations.

He projects the index will reach 17,500 by mid-2018, before the rally runs out of steam as short-term bond yields catch up with long-term yields.

The U.S. Federal Reserve also is raising rates and is shrinking its approximately $4.2 trillion portfolio of bonds and other securities, while the Bank of England has signaled rates could rise in coming months and the European Central Bank is considering a reduction in stimulus.

“This means that the monetary tailwind of the last eight years is about to become a headwind,” said Colin Cieszynski, senior market analyst at CMC Markets Canada.

“My outlook for 2018 remains cautious ... it’s the second year of the presidential cycle which tends to be weaker and more volatile for stocks.”

Investors say the bull market in global stocks could be disrupted by uncertainty ahead of U.S. mid-term elections next year and the threat of trade wars.

Canada, which is in talks with the United States and Mexico on the North American Free Trade Agreement, fumed last week over a U.S. decision to slap a 220 percent preliminary anti-subsidy duty on Bombardier Inc’s (BBDb.TO) CSeries jets after rival Boeing Co (BA.N) accused Canada of unfairly subsidizing the aircraft.

(For other stories from the Reuters global stock markets poll)

Reporting by Fergal Smith; Editing by Bill Trott

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