Canadian equity investors, head south because the U.S. stock market will be the place to be next year.
That’s a conclusion to be drawn from the projections of the financial seers at BMO Nesbitt Burns Inc., the latest investment dealer to glance at the tea leaves for clues on where the best money making opportunities lie in 2013.
Held back by a tapped out consumer, weaker housing prices, and lacklustre commodity prices, the S&P TSX composite index will significantly underperform U.S. equities, advancing to only the 12,900 level next year, up about 4.5 per cent, according to the bank. The S&P 500, meanwhile, is likely to have nearly double the percentage return, rallying to 1,575,or a gain of about 8 per cent from current levels.
Investors “will flock back to the United States” to buy stocks, predicts Brian Belski, chief investment strategist at BMO. “We think the U.S. is really the template for fundamentals around the world.”
One factor propelling U.S. stocks will be improved earnings, with surprises “to the upside” particularly in the second half of the year, Mr. Belski said on a conference call Thursday on the bank’s outlook.
He also predicted that investors will further warm to U.S. equities because of perceptions that the quality of earnings is improving, with companies reporting stronger balance sheet strength and more consistent operating profits. This, in turn, should cause investors to be willing to pay more for stocks, driving up price-to-earnings multiples.
Among the U.S. sectors to be overweight are industrials, energy, and technology.
In Canada, BMO advises overweight positions in financials and industrials, being neutral towards commodity producers and underweight in consumer discretionary stocks. “We believe financials are the pillars of stability in the Canadian market place,” Mr. Belski said.
The bank favours investments in the U.S. because it is likely to have quicker paced growth, with both the housing and automobile sectors reviving. The country is also receiving a boost from a growing production of energy.
However, in the U.S. banking sector, BMO says regional financial institutions are likely to outperform the big, multinational banks, which are facing the threat of increased regulation.
Part of the bank’s more favourable U.S. investment outlook is based on a forecast that Canadian economic growth is set to lag the pace in the United States.
“On the domestic front, almost every major driver that you look at has some sand in the gears,” commented Douglas Porter, the bank’s deputy chief economist.
He cited consumers who are dealing with a record debt burden, while experiencing sluggish income growth. The housing market is also weak, while the strong Canadian dollar is holding back exports.
Mr. Porter said the only debate on the Canadian housing market is whether the downturn will be large or small. His best guess was any correction will “be on the mild side.”
Among investment sectors, Paul Taylor, chief investment officers for BMO Asset Management, said stocks have the best prospects and should be overweighted in portfolios. Improving earnings and the possibility of a growing stream of dividends make a compelling case for equities.
“People have referenced it as the T.I.N.A. market and that is ‘There Is No Alternative’ to equities at this particular point in time,” Mr. Taylor said.