Strategists lower their sights for TSX, but current rally ‘has legs’

TORONTO — Canada’s main stock index is set to extend its rebound over the coming months as well as in 2021, but will fall short of previous expectations as the global economy struggles to fully recover from the coronavirus crisis, a Reuters poll found.

The commodity-linked S&P/TSX Composite index has rallied about 35 per cent since plunging in March to a more than eight-year low, supported by steps to reopen the world economy and a rally in oil prices after U.S. crude hit a record low.

The median forecast in a survey of 25 portfolio managers and strategists was for the TSX to rise 2.9 per cent to 15,590 by the end of 2020 from a closing level of 15,148.12 on Tuesday. In February, when the index notched a record high at 17,970.51, the forecast was 18,175.

The TSX is then expected to climb further to 17,000 by the end of 2021.

“Despite a deep recession, the current equity rally has legs,” said Dominique Lapointe, a senior economist at Laurentian Bank Securities. “Investors are seeing through the downside and still expect the level of business profitability to return to some form of normality in the future.”

The Bank of Canada expects the domestic economy to shrink as much as 30 per cent in the second quarter from the fourth quarter of 2019. It has slashed interest rates to near zero and begun a large-scale bond-buying program for the first time, while Ottawa is rolling out about$300 billion of economic support measures.

Investors say that economic stimulus, low interest rates and progress on containing the coronavirus pandemic are supportive of stocks but it could take some time for activity to get back to its prior level.

“The bounce back in activity will be sharp coming out of very depressed levels. However, absent a medical breakthrough (on a vaccine for the novel coronavirus), it won’t be as vigorous later,” said Angelo Kourkafas, investment strategy analyst at Edward Jones. “We therefore believe GDP and earnings will take several years to reclaim the pre-crisis highs.”

Energy and basic materials make up nearly 30 per cent of the TSX’s market capitalization, so the TSX tends to be sensitive to the outlook for global growth.

Financials account for a further 30 per cent. They have been supported in recent years by a strong domestic housing market that has been accompanied by record levels of borrowing by Canadians.

“The financial vulnerabilities that have been building in Canada for a while now, namely elevated household debt levels and a frothy housing market, will be major headwinds for full economic recovery,” Kourkafas said.

© Thomson Reuters 2020

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