Corporate profits will be a major driver of equity market growth in 2014, according to Vincent Delisle, investment strategist, portfolio strategy group with the Bank of Nova Scotia. Delisle spoke at Scotiabank’s annual Economic and Market Outlook Conference in Toronto on Tuesday.
For most of 2013, market performance was driven by P/E multiple expansion, according to Delisle, but that is all about to change. “Valuations are now back to average levels,” he said Delisle. “So from that standpoint, on the P/E multiple side don’t expect much from 2014.”
Delisle estimates world equity markets will grow between 6% and 10% in large part due to profit growth. Furthermore, global economies are expected to do well in 2014, said Delisle, which is one of the factors contributing to improved profit earnings worldwide in recent months.
Looking more closely at North America, U.S multi-national companies in particular are poised to have strong earnings in 2014, according to Delisle. “With the Euro recession ending early this year,” he said. “U.S. multi-nationals should see profit growth ramp up.”
Canada, while seeing some strength in corporate profit earnings in 2014, will be held back a little bit due to the struggling commodity sector. While commodity prices have stabilized recently, said Delisle, there are still “clouds over hanging the market.” Unless Chinese growth reaches above 8% it is unlikely there will be a big ramp up in commodity prices in the near future.
In terms of specific sectors, Delisle said investments set to do well in 2014 are those that will benefit from higher bond yields, a stronger U.S. dollar and a pick-up in U.S. economic growth. For example, financials – particularly banks and insurance companies – technologies, consumer discretionary and industrial products are all positioned to perform well next year.