Oil Rally Makes It All Good for Canadian Markets

  • RBC’s Barasch sees S&P/TSX rally to records over 18 months
  • Economy shows signs of export recovery on oil production

Canada’s getting its mojo back.

Prospects for the country turned a corner this week as OPEC put a floor under oil prices, Prime Minister Justin Trudeau approved two oil pipeline projects and economic data surprised to the upside, offering relief after two years of lackluster growth on crude’s rout.

The trifecta of good news, along with forecasts for a Trump-inspired resurgence in the U.S., prompted some analysts to post bullish forecasts for the economy and the stock market -- already the best-performing among the world’s best developed markets.

“The resource opportunity for Canada is something that’s worked out well and should continue,” said Derek Young, president of Fidelity Investments’ Global Asset Allocation unit, in a phone interview from Boston on Thursday. Fidelity manages about $2.1 trillion in assets. “In terms of commodity exposure, Canada is well-positioned.”

The benchmark S&P/TSX Composite Index closed down 0.4 percent to 15,027.53 in Toronto on Thursday, just off its highest level in 18 months after completing the fifth straight month of gains in November -- the longest stretch of wins since April 2014. The market has advanced 16 percent this year, well ahead of second-place Norway at about 10 percent.

Matt Barasch, chief Canadian equity strategist with RBC Capital Markets, expects Canadian equities to continue their bull run over at least the next year, forecasting the S&P/TSX to surge to a record 16,300 over the coming 18 months -- implying about a 12 percent total return from current levels.

Already Celebrating

This coming year “sets up well for Canadian stocks,” with the potential to extend its streak of outperformance against U.S. stocks for at least another year, Barasch said in the report.

Royal Bank’s commodity team expects crude will continue to rise throughout 2017, surging to $61 by the fourth quarter of the year, about a 20 percent increase from current prices. This is key for Canada as over the past 20 years oil prices have risen more than 10 percent on nine occasions, with the S&P/TSX outperforming the S&P 500 Index during those times by an average of 14 percent after adjusting for currency, Barasch said.

Canada’s oil patch is already celebrating after OPEC approved its first supply cut in eight years this week, sending crude soaring, and the Canadian government approved Kinder Morgan Inc.’s Trans Mountain pipeline expansion, with conditions, along with Enbridge Inc.’s Line 3 proposal. Also this week: gross domestic product expanded at an annualized 3.5 percent pace in the third quarter, with energy exports rising 27 percent as the industry rebounded from wildfire disruptions in Alberta. Canada’s current account deficit meanwhile narrowed in the third quarter from the widest levels in six years.

After more than 50,000 direct job losses in the oil patch since the rout began in 2014 and 75,000 indirect jobs cut, according to the Canadian Association of Petroleum Producers, data also showed investment cuts may be stabilizing. While capital expenditures still tumbled 30 percent in the third quarter from the same quarter of 2015, that’s about even with the 29 percent drop in the previous quarter and down from the 35 percent and 48 percent drops in the previous quarters, according to figures from Statistics Canada.

Housing Slowing

Among the biggest winners, MEG Energy Corp. posted its best two-day advance since March with a 28 percent gain.

Also central to RBC’s thesis is whether the “good” Donald Trump implements his pro-energy, infrastructure-heavy campaign promises, while keeping his “bad” anti-trade, anti-immigration tendencies at bay, Barasch said.

“With the potential for increased U.S. demand, coupled with significant supply curtailments, the stage is set for some recovery in commodity prices,” Barasch said.

To be sure, Canada faces hurdles ahead. The housing sector, a major source of growth for the economy in recent years is slowing down. Investment in residential structures fell 5.5 percent in the third quarter, the largest decline since 2010, and the first drop since early 2014, Statistics Canada reported Wednesday. And even with the pick-up in the third quarter, the export sector is on pace for its worst year of growth since 2009.

Boosts Forecast

Still Fidelity’s Young is optimistic Canada will be able to continue its recent run of good fortune, especially as the U.S. market improves. He sees the stock markets for Canada and the U.S. rising neck-and-neck.

“If the U.S. manifests into a Trump-fueled boom, I think we could see exports become even more important for Canada,” Young said.

Douglas Porter, chief economist at Bank of Montreal, said the GDP data sets the stage for upward revisions to Canadian growth for this year and next, buoyed by firming oil prices and the potential for U.S. fiscal stimulus. He boosted his forecast for the Canadian economy to grow 1.4 percent in 2016, compared with a previous projection of 1.2 percent.

“While admittedly not a big change, it’s the upward direction of the revisions that matters, reinforcing the view the BOC is not going anywhere with policy for a long time,” he said referring to the diminishing chances of the Bank of Canada cutting interest rates.

— With assistance by Robert Tuttle

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