Stocks Set for Meager Gains in 2018 on Consumer Debt Loads

(Bloomberg) -- Investors counting on a rebound in Canadian stocks following a lackluster 2017 are likely to be disappointed.

Canada's equity benchmark will rise about 4.4 percent in 2018, a return that would lag last year's 6 percent gain that trailed most global indexes, strategists say.

The S&P/TSX Composite Index will end the year at 16,928, compared with 2017's closing mark of 16,209, according to the average of nine estimates compiled by Bloomberg. This compares with an average year-end forecast of 2,875 for the S&P 500 Index in the U.S, a projected gain of 7.5 percent.

"A lot of people who are bullish are looking at valuations and thinking Canada's got to play catch-up," said Sadiq Adatia, who oversees about C$20 billion ($15.6 billion) as the chief investment officer at Sun Life Global Investments. "I don't buy into that story."

Sun Life has the most bearish forecast, calling for the benchmark to end the year at 15,200, a decline of 6.2 percent.

The Canadian benchmark index rose to a record high on the first trading day of 2018, gaining 0.6 percent to about 16,310.

Adatia sees four key risks facing Canadian stocks this year: high consumer debt levels, falling home prices, a potential slowdown in wage and job growth and the renegotiation of the North American Free Trade Agreement. He believes consumer discretionary stocks are most at risk, while utilities and telecoms will be the safest investments.

Unlike other forecasters, Adatia isn't bullish on the outlook for the energy patch, which he believes won't start to rebound until West Texas Intermediate prices rise above $60. Adatia's forecast calls for crude prices as low as $50 in 2018, from about $60 now.

Luc Vallee, chief strategist at Laurentian Bank Securities, begs to differ. Vallee sees the Canadian benchmark hitting 18,000 by the end of the year, a target that makes him the most bullish forecaster with an implied return of 11 percent. Vallee was about 300 points off on his 2017 year-end forecast of 16,500.

Vallee believes WTI prices will rise to the high $60s in 2018, allowing Canadian energy companies to "cry for joy," he said. On top of that, he sees an end to the glut that held down Canadian crude prices this year as pipeline building revs up.

“Given the weight of the energy sector in the TSX, it's going to explode," he said. The energy index accounts for about 20 percent of the benchmark.

Craig Fehr, Canadian investment strategist at Edward Jones & Co., is in the middle of the pack with a forecast of 17,050. He sees energy stocks getting a lift from a rebound in the oil patch, while consumer discretionary and financials will face headwinds.

"That's based on my view that I think economic growth is going to slow quite materially in 2018," Fehr said. He sees 1.5 percent GDP growth this year, about half of what's expected for 2017.

Some of the forecasts for 2017 were spot on; others not so much. Among forecasts compiled by Bloomberg in March, Canaccord Genuity Group Inc.'s Martin Roberge and RBC Capital Markets' Matt Barasch were tied for the closest estimate at 16,300, less than 100 points from the year's closing price. The most bullish forecast was from Fiera Capital Corp.'s Candice Bangsund, who saw the TSX closing out the year at 16,575, while the most bearish was 15,150 from Manulife Asset Management's Philip Petursson.

Here are the strategists' calls for 2018, ranked from bears to bulls:

Sun Life: 15,200
RBC Capital Markets: 16,300
Russell Investments: 16,900
Fiera Capital: 16,900
Manulife: 17,000
Edward Jones: 17,050
Scotia Capital: 17,400
BMO Capital Markets: 17,600
Laurentian Bank: 18,000

--With assistance from Julie Rombom

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, David Scanlan

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