BMO’s chief investment strategist Brian Belski started 2019 forecasting that the S&P/TSX Composite Index would hit 17,000 by the time this year was out.
Last week’s break above that milestone for the first time ever has made him - so far at least - one of the most accurate forecasters for Canadian stocks this year.
Mr. Belski’s bullishness isn’t receding as the decade comes to an end. And if he’s right, 2020 will shape up to be another profitable year for investors in domestic equities.
In his new market outlook released Thursday, Mr. Belski’s “base case” 2020 year-end price target is 18,200, representing a healthy gain of 7 per cent from where the index stands today.
His reasoning is similar to last year when looking ahead to 2019. The TSX is still beaten down versus other global markets and valuations are reasonable given prospects for earnings growth.
“While Canadian fundamentals have softened through 2019 as analysts have trimmed forecasts, fundamentals remain resilient according to our models,” Mr. Belski said in his forecast. “In fact, despite the downtrend in earnings revisions heading into 2020, profitability remains near peak levels, cash flow is firmly above historical averages, dividends and buybacks continue to grow, and valuations are relatively attractive.”
"As long as positive macro forces remain in place, particularly from the U.S., we believe Canadian equities offer an attractive relative value opportunity within North American markets. Furthermore, we believe earnings expectations remain cautious heading into 2020, leaving ample room for the TSX to under promise and over deliver with any upside compromise on trade, signs of positive life in commodities, or a rebound in growth."
It should be noted that Mr. Belski was originally calling for the TSX to hit 18,000 by this December. In January of this year, he trimmed that forecast by 1,000 points, given last December’s sudden downturn prior to Christmas that then unwound starting on Boxing Day.
And Mr. Belski is forecasting an even better return for the S&P 500 next year of 9.5 per cent, with the benchmark index hitting 3,400 by the time 2020 draws to a close. As is the case for his TSX target, that assumes an environment where stocks continue to grind higher, but with periods of elevated volatility as questions remain on the trade front.
The trade dispute is undoubtedly the biggest wild card heading into the new year, and should there be a “substantial” trade agreement between the U.S. and China, Mr. Belski sees potential for the S&P 500 to reach 3,675 by end-2020, and the TSX 19,100, given such a deal should ignite corporate investment and an upturn in global growth. But if trade negotiations take a turn for the worse and global recession fears reignite, he offers a “bear” case target of 2,775 for the S&P 500 and 14,900 for the TSX.
For the TSX for next year, Mr. Belski recommends investors overweight stocks in the communication services, energy and financial sectors, while underweighting health care and utilities. He has a market weight recommendation of consumer discretionary, consumer staples, industrials, information technology, materials and real estate.
Canadian investors may be forgiven for expressing some skepticism on Mr. Belski’s upbeat call for the oil patch. But he insists that with valuations at or near record lows on both an absolute basis and relative to the broader market, energy stocks can outperform significantly over the next several quarters.
“More importantly, our work shows fundamentals have significantly improved in recent years - valuations are at or near record lows, profitability is back to historical averages (even at current oil prices) and cash generation is strong," he said.
As for the financials, he sees juicy dividend payouts continuing alongside decent capital appreciation.
“The flat/inverted yield curve has many investors and analysts concerned about net interest margins compression. However, we believe many of the concerns are misplaced as the sector continues to display strong profitability, consistent earnings growth and dividend stability. Furthermore, foreign revenue exposure among banks has increased significantly over the last 10 years, providing additional channel to maintain and growth profitability,” he said.