(For complete coverage of 2014 predictions for investors, see our Market Outlook page)
The Toronto stock market lived up to its predicted modest gains for 2013, closing up about six per cent, but there's optimism in the air for Canada's main stock market for the year ahead.
"I think 2013 marks the end of (a) period of time of sharp underperformance," said Bob Gorman, chief portfolio strategist at TD Waterhouse. "I think in the coming year we will see a convergence of returns between the Canadian and U.S. markets."
The TSX increase this year was not much compared to New York, where the Dow Jones industrials was on track to jump more than 20 per cent. However, it's still a big improvement over the previous two years when the Toronto market gave back 3.5 per cent in 2012 and 11 per cent in 2011.
Looking past the areas where the markets took the biggest hit – materials in general and miners specifically – the resource-weighted TSX did relatively well.
The TSX was hobbled by a 34 per cent slide in the materials sector, which includes both precious metal and base metal miners, but there were impressive gains in sectors that could be also attractive to investors in 2014.
For example, the financial sector was off its best levels of the year after losing ground early in December when the latest earnings failed to impress. But that sector is still up 17 per cent for 2013.
Industrials ran ahead 31 per cent amid strong performance by the two big railways, CN and CP, which saw their bottom lines fattened by higher shipments of crude.
And the energy sector gained about seven per cent, with oil prices up about six per cent to just under US$98 a barrel.
But the biggest strength for the TSX going into 2014 is its makeup – heavily weighted in favour of energy and mining stocks.
"It's a proxy on global growth more than the U.S. because of the resources," said Wes Mills, chief investment officer of ScotiaMcLeod Portfolio Advisory Group.
That should give the market a lift as the resource sector, which was badly beaten in 2013, makes a predicted climb back in the global economy recovery. And Gorman pointed out that this will be the first year of synchronous global economic growth since the credit crisis of 2007.
"What tends to work better at this later stage of the cycle is your industrials and materials," said Wes Mills, chief investment officer ScotiaMcLeod Portfolio Advisory Group, who predicts the sector could makes gains in the area of 10 per cent.
"Even if you just get stability in the golds, the potash, uranium and base metals, copper names, (they) should do better in the coming year," he said.
At the same time, it's hard to find analysts bullish on the gold sector that plunged 50 per cent this year. The metal itself tumbled from US$1,675.80 at the end of 2012 to barely above $1,200 in mid-December.
The Federal Reserve's quantitative easing efforts had pushed gold as high as US$1,900 in 2011 as investors thought the massive bond buying program would drive inflation higher.
"Global risks have been decreasing – it doesn't mean they're absent but they are decreasing, " said Gorman. "You have a pretty firm U.S. dollar and U.S. interest rates are rising – both of which make difficult times for gold. I think it's going to be a tough place to be."
As for the high-flying financials sector, it's doubtful that the group can repeat the strong showing in 2013. Part of the reason was a resurgence in insurance stocks, such as Manulife Financial (TSX:MFC). They got hammered in the wake of the 2008 financial collapse as interest rates plummetted to near zero and equity market gains dried up.
"The financial sector is going to be safe and steady," said Sadiq Adatia, chief investment officer Sun Life Global Investment. "They're probably going to hold up OK, they're going to have steady earnings, and have decent yields and if you want to hold something that's going to do that, that's exactly what these stocks will do."
Part of the reason for the strong advance in the industrials segment was a huge 59 per cent runup in Canadian Pacific (TSX:CP) in the wake of a boardroom coup by Bill Ackman of Pershing Square Investments who, until this fall, was CP's biggest shareholder.
But CP and CN have also benefitted from generally improving economic conditions, particularly the huge amount of crude which is being shipped by rail.
For example, CN's chief executive, Claude Mongeau, said in November that his company expects to double its shipments of crude in 2013 from 70,000 carloads in 2012.
That forecast came months after a derailment July 6 at Lac Megantic, Que., that killed 47 people. The accident brought oil shipments by rail sharply into focus and sparked calls for the manufacture of stronger tank cars and increased industry oversight.