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Canadian equities will gain nearly 10 percent next year but will not come close to where they finished 2014 as slumping energy prices and a weak economic outlook has prompted strategists to lower their outlook, a Reuters poll found. The poll showed Toronto Stock Exchange's S&P/TSX composite index closing this year at 13,213, in the red for the first time since 2011, but then staging something of a recovery in 2016.
Slipping steadily since April, the index closed at 12,789.95 on Friday. The median forecast of more than 20 strategists indicated it would firm to 13,500 by mid-2016 and 14,000 by the end of next year, still below its 2014 close of 14,632. The latest outlook is a sharp downgrade from a poll taken just three months ago that forecast the index at 13,850 by year-end 2015, 14,150 by mid-2016 and 14,775 by the end of next year. "It is really hard to see the index gaining any traction next year from the one-two punch of a Canadian economy that may be skirting the edge of recession, plus a slowing global economy," said Elvis Picardo, strategist and vice president of research at Global Securities. Crude oil prices have plunged to near seven-year lows of below $40 a barrel, weighing on the resource-linked index.
Two rate cuts by the Bank of Canada early this year to dull the sting of the oil price crash on the economy have done little to cheer investors, as the outlook for crude, a major Canadian export, remains weak for the whole of 2016. "Higher oil prices will be a crucial ingredient for improved earnings potential for the resource sector and ultimately improved sentiment towards domestic equities," said Shailesh Kshatriya, associate director for client investment strategies at Russell Investments Canada. The oil price shock that drove the Canadian dollar to its lowest in 11 years in September has so far failed to lift exports materially, as Bank of Canada Governor Stephen Poloz had hoped.
And as the US Federal Reserve inches closer to an interest rate hike, most likely on Wednesday, some investors may decide to dump Canadian stocks if it sends oil prices down as the US dollar rallies. However, some said a US rate hike could reduce market volatility and allow equities to reach new highs. Other positive catalysts mentioned by poll participants were signs of economic stability in China, a major buyer of the natural resources Canada produces; greater clarity on tax policies; and new infrastructure spending by the government.
Banks are "attractively valued and well-positioned to manage through the energy downturn," according to Philip Petursson, managing director of Capital Markets & Strategy at Manulife Asset Management. However, major banks have reported more bad loans in the energy sector than a year ago, and investors worry this could turn into more writedowns. Policy-easing by the central bank has fanned household debt levels and also made further investments in the property market a risky affair.

Copyright Reuters, 2016

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