North American markets and economies are likely to keep out of the red in 2014 despite a slow start in the first quarter, according to Paul Taylor, CIO, BMO Global Asset Management in Toronto.
“We expect the second half of 2014 to be a reacceleration from the weakness we saw coming into 2014,” said Taylor, who spoke as part of a BMO market outlook call on Thursday.
The first quarter of 2014 was disappointing for the U.S. because of bad weather and inventory work downs, said Taylor, although the economy should see a turnaround in the latter half of the year. BMO sees the U.S. economy improving for three reasons: accelerated business spending, stronger consumer spending as job creation picks up and an increase in spending at the state and local levels of government. “It’s important to note that state and local governments employ seven times as many workers as the federal government,” he said.
Canada’s economy will likely trail the U.S. in 2014, said Taylor, as consumers here face more headwinds than in the States where the housing market is starting to come back.
Capital markets on both sides of the border will see some growth in 2014. Bond yields will be modest to flat in both Canada and the U.S. as the Fed gradually normalizes interest rates. Said Taylor: “We do think there is going to be a slight upward bias to bond yields.”
In terms of equities, Taylor sees the earnings growth of the first quarter continuing throughout 2014 and S&P500 companies will see multiples of between 17 and 17.5 times. BMO has a target of 2,065 for the S&P500.
Canadian companies on the S&P/TSX will likely see the same multiple range in 2014, said Taylor, meaning the index will hit about 15,575. “[There’s] a decent backdrop for the economy, a decent back drop for capital markets,” he said, “but we’ll certainly struggle on the equity front to deliver better than single digit returns.”