The Canadian equity market has been one of the world’s worst performers so far in 2012, and that current weakness may continue to hang over the markets, says a new report from National Bank Financial.
The firm points out that Canada is among the worst performing developed country equity markets so far this year. It reports that the S&P/TSX 60 index ranks 21 out of 23 developed market indexes so far this year.
“Several variables have influenced the Canadian market’s poor performance including the inability to meet earnings expectations which has led to downward revisions of future earning estimates,” NBF says. Additionally, it notes that the resource sectors have been out of favour, with the energy and materials sectors among the worst performing segments within the S&P/TSX Composite Index.
On the bright side, this market weakness has resulted in improved valuations for a majority of S&P/TSX sectors, including the resource sectors, NBF says. Price-earnings ratios for the majority of sectors are currently below their 10-year averages, with the materials sector showing the largest discount, NBF notes. As well, dividend yields for nine of 10 sectors are above their 10-year averages.
Nevertheless, the report suggests that the current price weakness “may persist until markets experience some catalyst to turn the current trend around”. It says that potential triggers include significant stimulus from Chinese policymakers, and the emergence of an economic environment that leads to a weakening U.S. dollar.
In the meantime, NBF notes that the trend in downward revisions has yet to stabilize, with the TSX experiencing additional downward revisions over the last month. And, it says that 2013 estimates remain too optimistic.
NBF also suggests that analysts’ expectations for commodities are too optimistic over the next few quarters “given that current dynamics in global growth point to a strengthening of the U.S. dollar versus the Euro,” which it says will be a headwind for commodity prices and for resource stocks.