Economy & Markets

Issues causing TSX underperformance are now mostly in the past, says CIBC

By James Langton |

Notwithstanding its recent lagging performance, the TSX is now poised for a rebound, says CIBC World Markets Inc.

In a new report, CIBC suggests that Canadian stocks may be on the verge of a substantial rally in the coming year. "Over the past two decades, whenever the TSX lagged the S&P 500 by a wide margin, it rebounded by an average of no less than 16% in the following year," it says. "And the coming year may be no exception."

The firm suggests that a rally may be in the cards simply because recent TSX underperformance was driven by a number of events, which have now largely passed – such as a large discount on Canadian oil prices hurting energy stocks, a sharp drop in gold prices, and weakness in base metals due to fears of a hard landing in China. Other sectors, such as financials and telecoms, have had issues to deal with too.

But these are all mostly now in the past, CIBC suggests. Commodity prices have improved. And, it says, "while a slowdown in the housing market is still in the cards, the likelihood of a dramatic correction is very slim – and it appears that the market is waking up to this reality."

Moreover, a steeper yield curve is boosting spreads, and likely profits, for financials. "Accordingly, the financial sector might surprise on the upside in the coming few quarters," it says.

In terms of valuation, CIBC says, "The TSX as a whole is reasonably priced, with a forward PE ratio of 13 still a full point below its long-term average. Meanwhile, earnings yields are still well above what is offered by the bond market."

"The bottom line is that many of the forces leading to the notable underperformance of the TSX versus the S&P 500 are now behind us. With the TSX not expensive by any stretch of the imagination, it is possible that Canadian stocks might surprise on the upside in the coming year," it concludes.