While a number of strategists have been issuing outlooks suggesting the Canadian stock market will finally catch up and maybe even outperform Wall Street this year, BMO Nesbitt Burns analyst Brian G. Belski isn't among them.
In a strategy note today, he reiterated a ho-hum year-end 2014 target for the S&P/TSX composite index of 13,575. That's virtually where it's at on this first trading day of the year.
"We continue to believe Canadian stocks lack discernible fundamentals and our models are flagging downside risks, not upside risk. Furthermore, even though the materials sector weight in the S&P/TSX has dropped significantly in the last few years, Canadian equities will likely to continue to underperform more diversified markets such as the U.S.," he said.
That's not to say there's no money to be made. It's just that he thinks 2014 will be a stock-pickers market. The S&P/TSX index rose 9.6 per cent in 2013, with most of the gains coming in the final quarter. The year saw sharp trading in both directions amid volatile emerging market growth and swings in commodity prices.
Mr. Belski sees these trends continuing into 2014, with earnings per share for the index rising a modest 3.5 per cent. He recommends investors favour Canadian financials and industrials while underweighting consumer discretionary and utility stocks.
Here's his thoughts, including top picks, on those sectors:
Financials:
He believes investors will continue to be attracted to the sector given high dividend payouts and earnings consistency. He thinks fears surrounding a housing bubble are overdone and suggests investors favour banks over insurers. Best stock ideas are CIBC, Intact Financial, Manulife Financial, Scotiabank, TD Bank and TMX Group.
Industrials:
Mr. Belski believes the sector could benefit from a manufacturing "renaissance" back to North America from overseas and prefers railways, conglomerates and select machinery stocks. Favourite stock ideas are Bombardier and Canadian National Railway.
Consumer discretionary:
He's worried about this sector because household debt is at dangerous levels, and cooling home prices presents an additional risk. He outlined two favourite ideas in the sector, however: Magna International and Thomson Reuters.
Utilities:
Mr. Belski warned that valuations are reaching historical peaks, and suggests investors focus on dividend growth instead of absolute yield. His favourite stocks in the sector are Algonquin Power & Utilities and Canadian Utilities.
Darcy Keith