TORONTO (Reuters) - Investors have soured further on the prospects for Canadian equities given slumping energy prices and worries about slowing growth in China, a Reuters poll showed, although a slight rise from the market’s current beaten-down level is expected.
The Toronto Stock Exchange’s S&P/TSX composite index is now forecast to post a loss for the year in 2015, its first year in the red since 2011. In 2016, it is seen making only plodding progress higher.
“Slow growth is coming to Canada with the potential for further decay in the commodity space,” said Jay Bryant, from MacNicol and Associates. “This will mute returns.”
While the index has steadily slipped since April, the outlook among those polled last week was much darker than three months ago, when the index was at around 14,500 points. It closed on Tuesday at 13,036.96.
The median forecast of around 25 strategists was for the TSX to eke out gains to 13,850 by year-end and to get to 14,150 by the middle of 2016. It should reach 14,800 by the end of next year, around where it ended 2014.
In late June, strategists were looking for 15,200 by the end of 2015, sentiment little changed from the poll in March..
“With the benefit of hindsight, the rally we saw earlier this year ... was obviously a head-fake,” said Elvis Picardo, strategist at Global Securities.
He said the “intensely bearish environment for commodities and energy” could create a surprisingly deep recession in Canada and that optimistic earnings expectations despite the threats “could set the stage for massive disappointment”.
The Canadian economy slipped into a recession in the first half of the year as a plunge in oil prices took its toll on the economy.
However, the Bank of Canada has expressed optimism the economy will come out of its slump by the second half of the year driven by stronger U.S. demand for Canadian goods, and helped by a weaker currency.
The Canadian dollar has lost about 15 percent against the greenback since the start of the year. But that has failed to lift exports materially so far due to tepid global demand.
Also, the Canadian housing market boom which helped lift the economy out of the 2008-2009 recession is wobbling, with some economists warning of a sharp correction, especially in Toronto and Vancouver. [CA/HOMES]
Bank of Canada Governor Stephen Poloz has also expressed concerns over the potential risk high household debt poses to Canada’s financial stability.
And as the U.S. Federal Reserve inches closer to an interest rate hike, possibly by the end of this year, it will likely push some investors into dumping Canadian stocks further.
Canada’s TSX has lagged most global equity benchmark indexes so far this year, down almost 9 percent after a late 2014 slide that coincided with crude’s early troubles.
So far this year, oil and gas companies, one-fifth of the TSX’s weight, are down about 25 percent, while mining stocks have lost almost half their value.
Asked the biggest risk to global markets, the most popular response was a further slowdown in China, a major buyer of the natural resources Canada produces, closely following by broader slowdown globally and weak corporate earnings.
“Weak global growth and inflation is the biggest risk which may be partly caused by a slow China and could impact corporate earnings,” said Colin Cieszynski, chief market strategist at CMC Markets. “This is the nexus around which forecasts operate.”
Cieszynski, the most optimistic of the prognosticators surveyed, said stable growth in China and the start of a U.S. Federal Reserve rate hike cycle should allow stocks to rally.
“Stock markets have priced in a U.S. interest rate hike since March, and will likely go up on a rate hike, seeing it as a vote of confidence,” he said.
Additional reporting and polling by Anu Bararia in Bengaluru and Solarina Ho in Toronto; Editing by Ross Finley and W Simon