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Bullish view on Canada’s TSX tempered as analysts fret about growth

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TORONTO, May 25 (Reuters) – Canada’s main stock index is expected to advance less than previously thought this year as economic growth slows and central banks raise interest rates, a Reuters poll found.

The median prediction of 26 portfolio managers and strategists was for the S&P/TSX Composite index (.GSPTSE) to rise 4.4% to 21,183 by the end of 2022, compared with a forecast of 22,175 in the previous poll in February.

It was then expected to move up to 22,000 by the end of 2023 but fall short of the record closing high of 22,087.22 that it reached on March 29.

“There’s been a major adjustment in the markets as we have transitioned from rapid growth and excess liquidity last year, to slowing growth and monetary tightening this year,” said Angelo Kourkafas, investment strategist at Edward Jones in St. Louis, Missouri.

“The latter is not a good combination for equities.”

Money markets expect the Bank of Canada to raise interest rates by half a percentage point at a policy announcement next week. That would be the second straight half-point move by the central bank, which usually raises rates in quarter-percentage-point increments.

However, the TSX’s 4.4% decline since the beginning of the year is much less than some other major benchmarks, including the Standard & Poor’s 500.

Heavy weighting in sectors that benefit from higher commodity prices has helped. Combined, the energy and materials groups account for 28% of the Toronto market’s valuation.

But, as inflation shows signs of peaking, some investors expect the period of outperformance for commodity-linked stocks to be nearing an end.

“As we move into next year and global growth becomes a larger concern, we expect weakness in commodities to turn the TSX into a relative underperformer versus global markets,” said Chhad Aul, chief investment officer and head of multi-asset solutions at SLGI Asset Management Inc.

Most investors that answered a set of separate questions expected volatility in the Toronto market to decrease over the coming three months. Still, headwinds are likely to linger.

“We expect interest rate hikes to have a significant effect on the Canadian housing market in the second half of 2022 and in 2023,” said Lorenzo Tessier Moreau, senior economist at Desjardins.

“Higher interest rates are generally favourable to earnings in the banking sector, but increased risk levels associated with the housing market could partially offset those gains.”

Data for April showed Canada’s average home price had fallen 6.3% from the previous month while sales dropped 12.6%.

“We think that central banks are in a difficult position and likely there is a potential for a recession in 2023,” said Ben Jang, a portfolio manager at Nicola Wealth.