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Stock markets will post gains in the year ahead, with the Canadian benchmark index once again outperforming Wall Street, according to CIBC’s 2023 Equity Outlook report released this week.

A single-digit return in 2023 is forecast for the S&P/TSX Composite Index, supported by a low valuation as well as an attractive dividend yield.

The report notes that the S&P/TSX Composite Index is trading at a forward price-to-earnings multiple of 12.6 times, a meaningful discount to its longer-term average P/E multiple of 14.9 times. In comparison, in the U.S., the S&P 500 Index is trading at a forward P/E multiple of 17.9 times.

The valuation discount relative to the S&P 500 has now widened to over five multiple turns. To put this in perspective, historically, this discount is between 2 and 2.5 times. As a result, CIBC believes this valuation discount will narrow next year with the TSX Index, once again, outperforming the S&P 500.

That being said, the upside potential for the TSX Index is expected to be contained due to: 1) deteriorating corporate profitability and falling earnings forecasts, 2) moderating but “sticky” inflation, and 3) high interest rates with the Bank of Canada not expected to lower its overnight rate until 2024.

The Canadian economic outlook is muted but not dire with real GDP growth of 0.6 per cent forecast by CIBC in 2023.

From a technical analysis perspective, analyst Sid Mokhtari also sees the S&P/TSX Composite Index outperforming the S&P 500. However, he anticipates the TSX will be range bound, trading between 17,800 and 21,000, “We estimate that the technical high for the market is front-end loaded, followed by bottom-building patterns in the middle of the year before recovery may begin to emerge in the latter part of the year.”

In terms of sector recommendations, he notes that the energy sector is continuing to show a strong technical backdrop.

Sector standouts

CIBC is recommending investors overweight three sectors: energy, communication services, and utilities. The report argues that energy, the top performing sector in the TSX in 2022, will remain a leader given its attractive supply/demand fundamentals and cheap stock valuations. Meanwhile, telecom and utilities stocks offer investors downside protection given their relatively defensive attributes marked by “high earnings visibility.”

The report rates five sectors as “market weight”: financials, health care, industrials, materials, and real estate.

CIBC has “underweight” recommendations on the consumer discretionary, consumer staples, and information technology sectors.

Stock picks

Equity analysts at CIBC revealed their 31 top stock picks across all 11 sectors, which are listed below accompanied by the analysts’ target prices:

In Financials, Royal Bank of Canada (RY-T) with a target price of $140, Brookfield Asset Management Inc. (BAM-T) with a target price of US$62, Sun Life Financial Inc. (SLF-T) with a target of $65, Intact Financial Corp. (IFC-T) with a target of $225, and Trisura Group Ltd. (TSU-T) with a target price of $60.

In Energy, top picks include Cenovus Inc. (CVE-T) with a target price of $32, Keyera Corp. (KEY-T) with a target of $33, and Enerplus Corp. (ERF-T) with a target of U.S. $22.

In Industrials, Canadian Pacific Railway Ltd. (CP-T) with a target of $120, Waste Connections Inc. (WCN-T) with a target of U.S. $156, and Ag Growth International Inc. (AFN-T) target of $53.

In Materials, Nutrien Ltd. (NTR-T) with a target price of US$106, Wheaton Precious Metals Corp. (WPM-T) with a target of US$60, Teck Resources Ltd. (TECK-B-T) with a target of $60, and Winpak Ltd. (WPK-T) with a target of $52.

In Information Technology, Shopify Inc. (SHOP-T) with a target price of $50 and Constellation Software Inc. (CSU-T) with a target of $2,300.

In Communication Services, Rogers Communications Inc. (RCI-B-T) with a target price of $69.

In Utilities, Brookfield Infrastructure Partners LP (BIP-UN-T) with a target of US$44, Boralex Inc. (BLX-T) with a target price of $45, and TransAlta Corp. (TA-T) with a target of $16.50.

In Consumer Staples, Alimentation Couche-Tard Inc. (ATD-T) with a target of $73, Loblaw Companies Ltd. (L-T) with a target of $145, and Jamieson Wellness Inc. (JWEL-T) with a target of $41.

In Consumer Discretionary, Magna International Inc. (MG-T) with a target price of US$65, Pet Valu Holdings Ltd. (PET-T) with a target of $48, and GDI Integrated Facility Services Inc. (GDI-T) with a target price of $62.

In Real Estate, RioCan REIT (REI-UN-T) with a target of $24, Granite REIT (GRT-UN-T) with a target of $90, and BSR REIT (HOM-UN-T) with a target of U.S. $19.75.

In Health Care, Chartwell Retirement Residences (CSH-UN-T) with a target price of $12.

ETF picks

CIBC recommended ETFs across three main categories.

Covered call ETFs

“Given our expectation that equities are likely to generate modest returns over the coming year, we continue to favour covered call strategies which typically offer yields in the 6 per cent-10 per cent range. Covered call ETFs work best in a sideways market with slightly elevated volatility, as they are able to harvest the volatility and generate high tax-efficient yields from the option premiums. Another main benefit of covered call ETFs is that they tend to be less volatile, as the option premiums can offset some of the underlying stock price downside in the event that equities drop in value.”

* Top picks include: BMO Canadian High Dividend Covered Call ETF (ZWC-T) and BMO Covered Call Utilities ETF (ZWU-T).

Energy ETFs

“The lack of spare production capacity in the energy supply chain is likely to extend outperformance. Additionally, energy companies have shown remarkable capital discipline which helped to restore investor confidence in the sector.”

* Top picks are: iShares S&P/TSX Capped Energy Index ETF (XEG-T), BMO Equal Weight Oil & Gas Index ETF (ZEO-T) and CI Energy Giants Covered Call ETF (unhedged NXF-B-T; hedged NXF-T).

Short-term investment grade credit ETFs

“With short-term corporate bonds trading at a yield-to-maturity in excess of 5 per cent (i.e., a credit spread of approximately 140 basis points), we view the sector as attractively valued on a reward/risk basis. The investor is also taking on limited interest rate risk as these ETFs typically have durations in the two to three year range.”

* Top picks include: iShares Core Canadian Short Term Corporate Bond Index ETF (XSH-T), BMO Short Corporate Bond Index ETF (ZCS-T) and Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC-T).

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