Climbing to new highs, the S&P/TSX Composite Index continues to shrug off negative news – weaker economic data, resurfacing USMCA chatter and housing concerns to name a few. How is the index doing this and can it continue?
We closed this position in January as we now expect the TSX to perform better with a mid-to-high single digit return over the next 12 months.Why? U.S. growth, although slowing, should be positive and lead global expansion. Next, China is showing signs of a rebound and growth looks to be stabilizing. All of which is supportive of Canadian equities.
The U.S. is by far our largest trading partner, roughly accounting for 75 per cent of exports. Concerns over NAFTA/USMCA appear to be overblown. While there is a slim chance that the U.S. pulls out of both, it appears unlikely due to the upcoming U.S. election, highly integrated supply chains and the large trade flows between the three countries.China’s deleveraging campaign was largely responsible for the slowdown in Chinese and global growth last year.
Recent rate hikes are still making their way through the economy, but employment growth is healthy, and unemployment is low which will support wage growth and help the consumer with higher interest rates. Last month, the Bank of Canada removed any bias for hikes this year – in line with central bankers globally. GDP estimates for 2019 were downgraded, as expected, but remain positive. Whether the central bank stays put or cut rates over the next 12 months, it’s a plus for Canadian equities.
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