Two prominent strategists are making starkly different forecasts of where Canada's stock market is headed as a two-month rally stalls.
On the bull side is Brian Belski, chief investment strategist at BMO Capital Markets, who sees the S&P/TSX Composite Index hitting 17,600 by the end of 2018 -- about 10 per cent higher than current levels. Taking the bearish view is Matt Barasch, Canadian equity strategist at RBC Capital Markets. Mr. Barasch has a 2018 year-end target of 16,300, just 1.8 per cent above Monday's close.
After struggling through much of 2017 in the red, Canada's benchmark index is up 4.7 per cent this year, still the third-worst developed market amid a ferocious global rally.
Mr. Belski has previously accused Canadian investors of harboring an "Eeyore complex," after the morose Winnie-the-Pooh character. He believes strong company fundamentals will eventually override investors' gloom.
Canadian investors tend to overreact to bad news and then pile into stocks when the outlook starts to brighten, he said.
"In 2016, Canadian investors were positioned for Armageddon and $15 oil and the banks to go bankrupt; when that didn't happen, it was a rush to own stocks," Mr. Belski said. "In 2017, it was doubt and rhetoric and what's going to happen with Nafta and tariffs and all of a sudden when nothing was happening there's a fourth-quarter rally."
He believes Canada is full of strong companies, citing the railways and consumer stocks like Loblaw Cos., Canadian Tire Corp., Dollarama Inc., and Restaurant Brands International Inc. Mr. Belski recommends an overweight position in financials, industrials and materials.
Mr. Belski has a strong track record of calling the market. In 2016, his year-end level of 15,300 was only 12 points off, and his 16,000 target for 2017 is so far on track -- unless a Santa Claus rally gives it another boost.
Mr. Barasch, meanwhile, sees Canadian stocks as essentially range-bound for the next year. He lowered his recommendation on the S&P/TSX to market weight from overweight, blaming stretched valuations and a lack of catalysts to drive further multiple expansion.
Possible headwinds include trade threats, central banks unwinding their balance sheets, slowing domestic growth, U.S. tax reform, stagnating oil prices, U.S. election risk, and signs that China is beginning to slow.
"As markets become more fully valued and earnings are recovering, your willingness to look past some of these issues begins to wane," Mr. Barasch said in a phone interview.
Mr. Barasch arrived at his 16,300 target by taking his 2018 earnings per share forecast of $930, a number he calls "fairly aggressive," and applying a multiple of 17.5 times.
"That would be close to the 90th percentile in terms of valuation historically for the TSX, so it's not an insignificant multiple," he said. Mr. Barasch recommends an overweight position in real estate, food-staples retail, railroads and life insurers.
Mr. Barasch only initiated coverage of the index in May 2016 with a 12-month target for May 2017 of 15,200. It closed out that month not far off at 15,350. He then called for the benchmark to close out 2017 at 16,300 before pushing that target back to 2018.
The biggest risk to his 2018 outlook would be a sudden rise in oil prices, Mr. Barasch said. West Texas Intermediate is currently trading at about $56 a barrel.
"If six months from now oil's at $65 and some of these other issues have cleared the deck, then we're probably going to be wrong, but absent that I think there's a good chance that 2018's just going to be a year where you're going to really have to grind it out for returns."