Stocks may have risen impressively in the past couple of months, but there is still room for gains, says a new report from UBS Securities Canada Inc.
In a research report, UBS observes that equities globally have rallied sharply in recent months, largely due to supportive monetary policy from central banks in the United States and Europe. “This has led to concern that the rally may already be running out of room, given there are limits to increases in risk appetite and that structural economic issues will soon cause growth surprises to revert to neutral or even negative readings,” it says.
However, UBS believes valuations still have room to expand. It says that the rebound since the October low has been entirely driven by multiple expansion. UBS’s 12-month forward earnings for the TSX are unchanged, while the forward price-to-earnings ratio has increased from 10.9x to 12.3x, it says.
Yet, it notes that this 1.4 rise in the P/E ratio is less that the 2.4 multiple point gain seen for the S&P 500 and Euro indices in the same period. “Our regression analysis shows that the improvement in risk appetite and growth should have taken the TSX’s forward P/E to about 14x – still below where it was in spring 2011,” it says.
“Moreover, we highlight that while growth surprises may abate, risk appetite has only returned to neutral. Accordingly, our TSX target remains at 14,000 and represents a 13.2x multiple on our 2013 earnings estimate – which still allows a cushion for macro surprises and unexpected volatility increases,” it concludes.