Financial strategists expect Canada's main stock index to rise more slowly in 2017 but to reach an all-time high by the end of next year if US President-elect Donald Trump's tax and spending plans boost economic growth, a Reuters poll found.
But risks to that outlook have multiplied, the respondents said, citing Trump's protectionist talk on trade, a sharp jump in global bond yields, and Canada's wobbly domestic economy as reasons for caution.
Trump's election is "likely to lead to a selloff as potential negative effects of actual policies become apparent in an overvalued market," said Integris Pension Management Corp Chief Strategist Gavin Graham, who expects Canadian stocks to pull back in the second half of next year.
Trump has promised to cut taxes and spend on infrastructure, which is good news for some Canadian companies, but he has also said he would renegotiate international trade agreements. Canada does the vast majority of its trade directly with its larger southern neighbour and would also suffer if rising protectionism stifled global growth.
The Toronto S&P/TSX composite index has rallied about 30 percent since hitting a three-year low in January. The Organisation of the Petroleum Exporting Countries' landmark deal last week to limit production has given more momentum to the price of oil, a key Canadian export.
The median forecast from the Reuters poll of more than 20 strategists over the past week was for the TSX to rise more than 6 percent to 16,050 by the end of 2017 from Tuesday's close of 15,125.80.
"I expect moderate gains in the domestic market, driven primarily by a rebound in corporate profits as energy-sector profits balance out from recent sharp declines," said Edward Jones Canadian market strategist Craig Fehr.
Fehr said subdued domestic economic growth would probably limit gains as a softening housing market, elevated debt and choppy employment restrain consumer spending.
The index, which fell about 11 percent in 2015, should close out 2016 at 15,113, up slightly more than 16 percent for the year, according to the median forecast. It should get to 15,704 by mid-2017, the poll showed.
"We think that stocks are overdue for a correction, so the first part of the year is likely to be weak," said Portfolio Management Corp Managing Director Norman Levine. "But then expect a stronger US economy to drag Canada along."
Other risks to the Canadian outlook included a further rise in global bond yields. That would "precipitate a chain of events such as reduced consumer spending and consumer defaults, weaken corporate earnings, cause greater flight into the US dollar and enhance the spread of populism politics," according to Sprung Investment Management President Michael Sprung.
The Canadian dollar is expected to weaken throughout 2017, according to a separate Reuters poll. And a third poll showed global sovereign bond yields climbing, though more gradually following the recent market rout.
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