BMO Capital Markets is forecasting a weak year ahead for stocks, after the markets’ strong rally this year, despite an improving economic outlook.
In a new report, BMO economists lay out their outlook for the coming year, noting that they see weaker equity markets ahead. “2013 saw major equity markets thrive even as the global economy and many other financial markets muddled through another sub-par year. Those roles may reverse in 2014,” the report says.
Indeed, while BMO sees global economic growth rallying — with Europe swinging from a 0.5% drop in GDP this year to a gain of about 0.8% next year, and U.S. growth accelerating from 1.8% this year to 2.7% next year — it only sees U.S. and Canadian equity markets recording “mid-single digit” gains.
It is forecasting the S&P 500 to reach 1,900 by the end of 2014, and the TSX to hit 13,575. “The good news for Canadian stocks is at least they will be in a horse race with the S&P 500 in 2014, after underperforming U.S. markets by double digits in each of the prior three years,” it says.
Of course, there are significant risks to the outlook. BMO concedes “we have seen this movie before, where forecasts call for a pick-up in the year ahead, only to get snowed under by events.” It says that the markets reaction to the expected tapering in U.S. monetary policy “is likely the biggest risk to the 2014 call, with stocks and bonds struggling in recent days as the inevitably of a less-generous Fed sets in.”
For emerging markets, BMO notes that it sees better-than 7% GDP growth again for China next year, bolstered by rising demand in the U.S. and Europe. “Other emerging economies should benefit as well, following a year which saw their equity markets and currencies struggle heavily with the prospect of Fed tapering,” it says.
“For financial markets, the improved growth backdrop may be largely already factored into current prices,” it notes, adding that commodity prices will find some support from a return of faster global growth.
But, it sees a firmer U.S. dollar pointing to further declines in the Canadian dollar. “We look for the loonie to head toward the $1.10 level (just under 91¢US) by late next year, but largely holding its ground against the euro and rising against the fast-falling Australian dollar and Japanese yen,” it says.
“Less fiscal drag in the U.S., a return to modest growth in Europe, and a stabilizing Chinese growth rate all point to a notable pick-up in global GDP in 2014, which should also give a small boost to Canada’s outlook,” the report concludes. “However, stocks may find it a bit tougher sledding, with the Fed finally dialing down QE3, bond yields set to rise further, and markets already largely pricing-in the expected growth acceleration in 2014.”