Canada’s main stock index is set to rise less than previously thought over the coming year as a slowdown in the global economy weighs on the outlook for corporate earnings, with investors favouring value over growth stocks, a Reuters poll found.
The median prediction of 21 portfolio managers and strategists in the Nov. 10-20 poll was for the S&P/TSX Composite Index to advance 3.7% to 21,000 by the end of 2024, compared with 21,800 expected in a previous poll in August.
It was then expected to climb to 22,000 by mid-2025, stopping just short of the record closing high set in March 2022 of 22,087.22.
“Our forecast incorporates a significant slowdown of the U.S. and world economies in the coming months as well as a recession in Canada in the first half of 2024,” said Lorenzo Tessier-Moreau, a senior economist at Desjardins.
“In this context, investor focus should shift from long-term interest rates to the direct effect of the economic outlook on earnings.”
Canada’s economy is flirting with recession and the downturn could worsen now a period of rapid growth in the United States is expected to end.
The International Monetary Fund last month said global growth remained low and uneven, and forecast it would slow to 2.9% in 2024 from an expected 3.0% this year.
Toronto’s market has advanced 4.4% since the start of the year, held back by a lower weighting in technology shares than some other major indexes, such as the S&P 500, and by declines for banks and mining shares.
So-called bond proxies, such as utilities and telecom stocks, have also been a drag, battered by the sharp rise in bond yields.
“We see an opportunity for laggards to catch up as the headwind of rising yields subsides. These include bond proxies at first, and small-caps along with value-style investments later,” said Angelo Kourkafas, an investment strategist at Edward Jones.
Money markets are betting the Bank of Canada’s tightening campaign is at an end and the central bank will shift to cutting interest rates as soon as April.
The Canadian 10-year yield has fallen more than 60 basis points from the 16-year peak it posted in October at 4.29%.
Value stocks, many of which are found in the heavily-weighted energy and financials sectors, tend to trade at more attractive valuations than high-flying growth stocks.
Six out of seven investors who answered a separate question said value stocks would outperform growth over the coming six months.
“We continue to favor value stocks over growth stocks, particularly quality at a reasonable price and high dividend payers,” said Ben Jang, a portfolio manager at Nicola Wealth.
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