Fears of a recession reduce the chances of the Canadian market continuing its performance this year.
Although the decline in the S & P / TSX Composite Index is less sharp than other global indices, the emerging economic downturn may test its resilience. Rising oil and gas prices helped boost energy stocks and kept the 9 percent drop for Canada’s key benchmark from following the S&P 500 to a 19 percent drop.
Now these energy price spikes are fading amid growing fears of an economic slowdown, leading some investors to flee the high S & P / TSX. Strategists such as Makan Nia, chief investment officer of Manulife Asset Management, are focusing on the next move by US politicians.
“If there’s a spin in the Fed’s tone that makes them less hawk, then US markets will be rallying against TSX,” Nia said in an interview. “The superiority we saw in the first half of the year between Canada and the United States – Canada can give that up.”
Energy stocks dominated the first half of the year amid a boom in commodities as investors sought safe haven amid escalating geopolitical risks. Of the top 10 companies with the highest profits, nine are oil and gas companies. Athabasca Oil Corp. increased by 114% and Tourmaline Oil Corp. increased by 72%.
Now this rally has fallen victim to fears of a recession due to the potential for lower demand if the economy slows. The S & P / TSX fell from a record high in March in correction, as financial performance and materials turned negative, while managing to overtake the high-tech S&P 500.
This is partly because oil, mining and financial stocks make up more than 60% of the Canadian index. They found favor with investors amid a resurgence of enthusiasm for value stocks.
The Canadian market started the year strongly, with market strategists widely calling on S & P / TSX to outperform its US counterpart. By early April, the benchmark had risen to surpass the S&P 500 in its widest three-month superiority in 13 years.
As fears of a recession escalated, S & P / TSX gave up these gains. Although energy is still at a high level as the only sector this year, it fell 13 percent from its peak in early June. Materials erased the climb it made earlier in the year, and banks fell 20% from their record high in February.
The stock strategist of Bank of America Corp. Osung Kuon is still optimistic about Canada’s energy sector. He predicts that the S&P / TSX will surpass the S&P 500 this year, as long as the recession does not devastate the value of the index’s shares.
RUNNING ROOM
“Energy still has something to do,” Kuon said in an interview. “Energy stocks don’t actually price the full benefit of $ 120 oil, and if you look at the free cash flow yield for these companies, producers are expected to generate an average of 15 percent free cash flow this year, compared to an S&P yield of about 5 percent.” so there is still a big discount from the assessment. “
Other strategists are still convinced that the Canadian market will surpass this year, even if there is a recession.
Kurt Rayman, chief investment strategist at BlackRock Inc., said energy and materials estimates are low, although their profits are set for strong growth, and this will lead the S&P / TSX to beat the S&P 500 on an annual basis for the first time since 2016. г.
“If the risk increases around a recession and this starts to affect commodities, then we will have a sale of garden varieties,” Reiman said at a consultative conference hosted by the Royal Bank of Canada last week. “But our view is that the prices of raw materials here are higher and due to the nature of the return of money to shareholders, we find this an attractive relative performance.
Add Comment