December 1, 2011 / 4:44 PM / in 6 years

TSX set to rise as euro zone cloud lifts: Reuters poll

TORONTO (Reuters) - Canadian stocks will rise in 2012 as policymakers iron out the euro zone’s sovereign debt crisis and improving economic data in Canada and the United States soothe investor concerns about global growth, a Reuters poll found.

Firmer Canadian and U.S. fundamentals will help send the commodity-linked Toronto Stock Exchange’s S&P/TSX composite index .GSPTSE to 12,225 by mid-2012, and to 12,500 by year’s end, according to median forecasts from 26 analysts polled over the past week.

The index closed up 4.0 percent at 12,204 on Wednesday, and the forecasts were 0.2 percent and 2.4 percent, respectively, above that.

Global indexes rallied on Wednesday after central banks around the world announced co-ordinated steps to prevent a credit crunch among banks in Europe struggling with the region’s debt crisis.

“Europe will continue to make the moves needed to keep things stable. We do not think the euro zone will break up. Or if it does it will be orderly,” said Kate Warne, Canadian market strategist at Edward Jones in St. Louis, Missouri.

“As a result, energy stocks will better reflect oil prices and we will see a rebound in financials, which have clearly been negatively affected by worries about the global financial situation.”

The Canadian stock index is trading at a 12-month forward multiple of 11.44 times, compared with its 10-year average of 14.34 according to Thomson Reuters I/B/E/S data.

The index’s key pillars of energy, financials and materials stocks have slumped this year by around 19 percent, 13 percent and 16 percent, respectively. Warne said those sectors were expected to lead the rebound.

Commodity prices, as measured by the Thomson Reuters/Jefferies CRB index .CRB, are down 15 percent from the year high on May 2.

Estimates for the index heading into mid-2012 ranged from 8,500-13,500 -- reflecting uncertainty and potential volatility. Targets for end-2012 were in a 10,500-14,700 range.

The index has fallen 9 percent this year, compared with a 14 percent advance last year and a 31 percent gain in 2009.

WORSE BEFORE IT GETS BETTER

Most agreed things could get worse before they get better.

Two years into the EU’s sovereign debt crisis, nervous investors are fleeing the euro zone bond market amid doubts about the survival of the single currency.

Analysts were mixed on how much the market had priced in the potential of a euro zone break-up. At current levels, the Toronto index is 15 percent below its March peak, and some analysts say markets have further to fall near term.

“When the market realizes that the euro zone does not stand for very much, we are going to have the mother of all risk-off days,” said John Stephenson, senior vice president at First Asset Investment Management.

“You have to realistically assume that it is going to become a banking crisis in Europe and regardless of how good our banks are it is not going to matter.”

Others, were less dire with their predictions.

“The market has priced in some sort of resolution to the euro zone crisis,” said Paul Taylor, chief investment officer at BMO Harris Investment Management. “The market has not priced in the best-case scenario for the euro zone.”

An improving U.S. economy has been the biggest countermeasure as decent employment numbers, consumer confidence data and retail sales have helped buffer markets from European headwinds.

Rick Hutcheon, president and chief operating officer at RKH Investments, said underlying fundamentals in North American markets remained solid and with, Europe’s dark cloud eventually lifting, he saw the TSX ranging sharply higher.

“If some of these issues get sorted out this market will absolutely fly”.

Additional reporting by Jennifer Kwan, additional polling by Ashrith Doddi and Sumanta Dey; Editing by Dan Lalor

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