Canada's TSX outruns Wall Street on earnings growth prospects as global economy rebounds

Value Exchange International

28/06/2021 17:58

By Fergal Smith
    TORONTO, June 28 (Reuters) - Soaring earnings growth
prospects for Canada's main stock index have raised portfolio
managers' confidence that the commodity-linked market's move to
a record high is justified and could boost the attraction for
global investors who rushed in this year.
    Analysts estimate that earnings for the TSX Composite
 .GSPTSE , which notched a record high on Monday, will grow
45.2% in 2021, Refinitiv I/B/E/S data shows. That is the fastest
pace in data going back to 2017 and runs ahead of the 36.9% rate
 for the S&P 500  .SPX .
    The level of growth reflects a rebound after earnings
slumped 18.1% last year as well as a particularly favorable
environment for Toronto-listed stocks, with many companies
highly geared to economic activity. Growth was 3.3% in 2019,
before the COVID-19 pandemic.
    Among the sectors with the highest estimated growth this
year are energy and industrials, at a 106.3% and 96.8% pace
respectively. Shares of resource, industrial and other cyclical
companies account for about 70% of the Toronto market, versus
40% of the S&P 500.
    Earnings estimates feed into measures used by investors to
assess value, such as the ratio of price to earnings. Strong
growth tends to support a higher valuation.
    "It's all about earnings," said Barry Schwartz, a portfolio
manager at Baskin Financial Services. "If the earnings rise in
concert with the stock price then you have a phenomenon where
'Holy smokes my stocks have gone up,' yet on a valuation basis
they are no more expensive."
    At 13.8, the price-earnings multiple for the TSX has barely
changed since the start of the year, according to the data.
Meanwhile, the index has gained 16%, outpacing major U.S.
indices.
    
    FOREIGN INFLOWS
    The S&P 500's multiple is higher, at 22.2, reflecting a much
heavier weighting in technology shares. But strategists at BofA
Securities said last week that the discount for the Toronto
market is overdone, especially because it is better-positioned
to benefit from global economic recovery.
    "If you believe that we're on a multi-year tailwind for
earnings growth, then you want to own those companies that are
going to benefit," Schwartz said.
    Foreign investors appear to have caught on, with data from
Statistics Canada showing that portfolio inflows into Canadian
equities have jumped to C$28.6 billion ($23.2 billion) in the
first four months of the year, the biggest inflow for the period
since 2017. It follows outflows for the full year in 2019 and
2020.
    "Global investors see the TSX as a way to benefit from the
upturn in the global economy," said Angelo Kourkafas, investment
strategist at Edward Jones in St. Louis.
    The IMF expects the global economy to expand 6% this year
after contracting 3.3% in 2020. The improved outlook has
bolstered commodity prices, including oil.
    There are risks to the outlook, such as faster-than-expected
interest rate hikes from central banks. But analysts expect
earnings growth to extend into 2022, at a rate of 10.8% for the
Composite index.
    Last month, portfolio managers in a Reuters poll forecast
the TSX would rise to 21,750 by the end of next year, about 8%
above current levels.  urn:newsml:reuters.com:*:nL2N2N81JB
    "The market is pricing in earnings growth and that earnings
growth will drive the majority of the index going forward," said
Kevin Headland, senior investment strategist at Manulife
Investment Management.
($1 = 1.2321 Canadian dollars)

 (Reporting by Fergal Smith,
Editing by Denny Thomas and Dan Grebler)
 ((fergal.smith@thomsonreuters.com; +1 647 480 7446;))