Toronto's stock market will make tepid gains over the rest of the year after surging since January but a potential recovery in the global economic outlook will propel the index to a record high by mid-2020, a Reuters poll found. The S&P/TSX composite index has rebounded more than 12 percent this year after slumping in the final quarter of 2018 as investors worried about global growth prospects.
Canada became the first industrialized nation to legalize recreational cannabis last October and the three top-performing stocks have been cannabis producers, including a near-doubling of the share price of Cronos Group Inc. The median forecast of 30 portfolio managers and strategists polled was for the Toronto market to rise just 1.0 percent from 16,225 by the end of the year. The index is then expected to climb to 16,900 by mid-2020, which would eclipse the record high of 16,586 set in July last year.
"Global economic data should bottom in the summer and start to recover in the fall of 2019, which will lead to further strength in equities," said Mike Archibald, associate portfolio manager at AGF Investments. The strength of the global economy is important for the Toronto market because the index has a heavy weighting in energy and mining shares. Investors said a trade deal between the United States and China could boost prospects for global growth.
US President Donald Trump said on Sunday he would delay an increase in US tariffs on Chinese goods thanks to "productive" trade talks and that he and Chinese President Xi Jinping would meet to seal a deal if progress continued. "The prospects of a trade war causing a global recession are fading and we have moved into the back half of the (US) presidential cycle, a time when presidents have historically pivoted from putting through contentious measures to planning their re-election campaign," said Colin Cieszynski, chief market strategist at SIA Wealth Management.
Trump has argued Federal Reserve interest rate hikes were undercutting his administration's efforts to boost economic growth. Fed Chairman Jerome Powell has pledged the Fed will make policy decisions "in a way that is not political." On Tuesday, Powell solidified a Fed policy shift last month in which it indicated it would pause a three-year cycle of rate hikes until the inflation or growth dynamics change.
Bank of Canada Governor Stephen Poloz last Thursday indicated he was in no rush to resume monetary tightening. "If the rate (hiking) cycle is broken and interest rates start to go down again ... earnings growth can be maintained," said Matt Skipp, president of SW8 Asset Management.
Still, investors may be reluctant to pay a higher multiple for Canadian earnings due to volatility in oil prices. The price of oil has rebounded more than 30 percent since plunging in December to an 18-month low. "EPS (earnings per share) variability is elevated due to a large portion of the index depending on energy prices," said Ben Jang, a portfolio manager at Nicola Wealth Management.
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