Why Canadian stocks will likely outperform in 2014

The market will rebound this year and may even see double-digit growth



Much has been said about how well global stock markets have fared over the past three years, but there’s one developed country that has lagged the rest: our own. While Canada recovered nicely in the wake of the recession, the S&P/TSX composite index is down 1% since 2011. Over the same period the S&P 500 rose 43%. Even some European countries have outperformed our market. Given their home-market bias, many Canadians have likely been surprised by just how little their portfolios have moved over the past couple of years.

There’s good news for these long-suffering investors. Many analysts and investment experts think 2014 will finally be Canada’s time to shine. Much of what’s ailed our country is now priced into stock valuations, and with the global economy finally moving in the right direction, every market, including ours, should see some sizable gains going forward.

Our struggles to date relate to the fact almost 80% of our market is concentrated in three sectors: financials, energy and materials. The last industry in particular has been badly beaten down. Materials, which accounts for 23% of the S&P/TSX composite, plummeted by 33% in 2013. Energy, which makes up 27% of our market, rose just 7% last year; over the past three, it’s down nearly 5%. Other than that our market has done well. Craig Fehr, Edward Jones’s Canadian investment strategist, points out that every other sector besides utilities and telecoms posted double-digit gains last year.

Expect better performance in the resource sectors in 2014, he adds. Materials have been hurt by China’s slowdown—there’s been less demand for commodities—but that growth pullback appears to have run its course. In fact, some economists think China’s GDP growth could speed up next year. Our energy sector has been hurt partly by low natural gas prices and the discount placed on Canadian oil compared to world benchmarks, but gas and oil prices have generally been flat or on the rise.

Materials and energy should also perform better in 2014 simply because many of the stocks in these sectors are now incredibly cheap. “Canada will do better because of valuations,” says Luc de la Durantaye, CIBC Asset Management’s head of asset allocation. “From that perspective we don’t see that drag continuing.”

There are other positive signs too, says Ian Hardacre, Invesco’s head of Canadian equities. People aren’t as worried about a Canadian housing crash as they used to be, and the Canadian financial sector—our other big industry—continues to be a well-run oligopoly. Banks may see modest gains next year, but the insurance sector, which is a big beneficiary of rising interest rates, could see solid growth for a second year in a row, he says. Industrials, meanwhile, should continue to benefit from the U.S. rebound.

Our market should see gains of between 7% and 9%, says Fehr. Add in an average 3% dividend, plus more global growth, and it may even break double digits. “It’s going to get better,” he says. “There’s more upside to come.”


(CB Archive)

(CB Archive)

It gets worse for gold: The yellow metal fell 28% in 2013—its worst one-year drop in 32 years—for a number of reasons, including the threat of tapering and a growing appetite for stocks. Credit Suisse also thinks it was in a bubble, suggesting it could fall to $900 an ounce by the end of this year.


Emerging markets re-emerge: Higher stock valuations in the developed world mean you have to take on more risk for a return. Many investors will, in emerging and especially frontier markets, where growth continues to surpass the global average by 150 basis points, according to the International Monetary Fund.