According to a Reuters poll, Canada's main stock index, the S&P/TSX Composite Index, is expected to continue its upward trend this year and hit a record high in 2024. The poll surveyed 21 portfolio managers and strategists in February 2023, with a median prediction of a 6.2% increase to 21,500 by the end of 2023. This is slightly lower than the previous poll's forecast of 22,000 in November. The index is then expected to reach 22,500 by mid-2024, surpassing the record closing high of 22,087.22 set in March 2022, but still lower than the November 2022 prediction of 23,000.
Drivers of the Upward Trend
Brandon Michael, senior investment analyst at ABC Funds, has attributed the current equity market's resilience to the deceleration of inflation, central banks' monetary policy easing, and improving investor risk appetite. The Bank of Canada has also signaled a pause in its tightening campaign, making it one of the first major central banks to do so. The bank says it will assess how well interest rate increases are working to lower inflation. Canada's annual rate of inflation was at 5.9% in January, down from 8.1% in June, according to data released on February 21.
Another factor driving the upward trend is the anticipated reopening of China, which is expected to boost commodity prices and resource stocks. Colin Cieszynski, chief market strategist at SIA Wealth Management, is among those who expect China's demand for materials to rebound this year.
Impact on Sectors
The energy and materials sectors account for approximately 30% of the Toronto market's weighting. Oil prices have already gone up by 9% since China reopened its economy in December 2022. However, analysts predict that there could be a correction in the near term, as eight out of 12 analysts surveyed in the poll believe that the chances of a correction in the coming three months are high or very high.
Chhad Aul, chief investment officer and head of multi-asset solutions at SLGI Asset Management Inc., believes that a correction is inevitable because the year-to-date rally in global equities has been disconnected from the realization that interest rates will need to stay higher for longer. The Canada 5-year yield has risen by around 80 basis points since mid-January to 3.59%, following the upswing in U.S. Treasury yields.
Conclusion
While the poll shows that the TSX index is expected to continue its upward trend, analysts warn of a potential correction in the coming months. Nonetheless, the anticipation of China's reopening and the Bank of Canada's pause in its tightening campaign are expected to continue driving the upward trend. Investors will need to stay vigilant and well-informed to navigate the uncertainties that lie ahead.
Footnote:
1 Adapted from source: "Toronto stocks seen up 6.2% by year-end, despite 'wall of worry'." Reuters, 22 Feb. 2023, www.reuters.com/markets/toronto-stocks-seen-up-62-by-year-end-despite-wall-worry-2023-02-22.
