Investors can expect more instability and uncertainty out of the eurozone in the months ahead, but equity markets in Canada will nonetheless deliver a “decent” performance, investment strategists at the Bank of Montreal said on Tuesday.
During the bank’s third quarter market outlook conference call, Paul Taylor, investment strategist at BMO Harris Private Banking in Toronto, said Canadian markets will be largely influenced by events in Europe, China and the United States throughout the rest of the year.
“From a Canadian perspective, as always, we’re not masters of our own destiny, which makes life difficult,” Taylor said.
The ongoing sovereign debt crisis in Europe, in particular, continues to impact markets worldwide.
However, the strategists said they’re encouraged by some of the policy developments that have taken place in the eurozone in recent months. For instance, the stabilization of the banking sector in Spain, and the progress made at the most recent European Union summit meeting in late June are positive signs, said Eoin Fahy, chief investment officer at Kleinwort Benson Investors in Dublin.
“Policy is moving in the right direction,” Fahy said. “Lots of achievements.”
However, investors clearly remain skeptical. Fahy noted that bond yields in Spain and Italy have continued to rise despite the positive developments.
“The bond market’s reaction hasn’t been helpful at all,” he said.
The most likely scenario in the months ahead, according to Fahy, is that the eurozone will continue to “muddle through”, with further policy developments but no major resolution to the crisis. But he warned that there remains the possibility that the crisis could drastically worsen – a scenario that would likely be followed by a radical policy response.
The recent slowdown in China is also impacting markets and economies around the world.
In Canada, the most significant impact of the weakness abroad has been on commodity prices, Taylor said.
“The importance of energy here in Canada cannot be overstated,” he said. “The fact that oil has moved from US$1.10 to the mid-$0.80s, that will create a challenging environment for Alberta and for the producers in Western Canada.”
As this trend plays out, Taylor expects the energy and materials sectors to struggle in the months ahead. In contrast, he’s bullish on the telecom, consumer staples and utilities sectors.
“We’ve seen positive leadership from those sectors that yield,” he said. “Those cyclical sectors have not provided leadership.”
Overall, he anticipates a “modest lift” in year-over-year earnings this year. He predicts earnings per share of $865-$890 for companies listed on the S&P/TSX composite index in 2012, up from $844 in 2011. That prediction is down from previous estimates of $900-$925 per share for 2012.
“It’s a decent but not a stellar outlook for Canadian equities.”