Investors see value in Canada's TSX but smaller gains for 2020

Toronto's stock market will rise over the coming year, adding to large gains in 2019, as low interest rates support the global economy and investors take a liking to its cheaper valuation than Wall Street, a Reuters poll found.

The median forecast in the Nov. 11-25 survey of 26 portfolio managers and strategists was for the S&P/TSX Composite index to rise 3.5% to 17,625 by the end of 2020 from Monday's record close of 17,032.86. The index has climbed about 19% since the start of the year.

"With interest rates roughly at all-time lows, with inflation non-existent ... I think we are still in a very good environment for stocks," said Allan Small, a senior investment adviser at HollisWealth. "I don't think we are going to see a recession in 2020."

Major central banks such as the Federal Reserve and the European Central Bank have eased monetary policy this year in the hope of improving the outlook for economic growth after it was buffeted by trade conflicts.

"Some kind of trade deal will likely be agreed to between the US and China and it should help calm markets and help capital investment get back on track," said Ben Jang, a portfolio manager at Nicola Wealth. "Valuations for Canada appear attractive compared to the US"

The Toronto market trades at a multiple of less than 15 times annualized earnings, based on a preceding 12-month period, versus a price-earnings ratio of about 22 for the S&P 500, data from Refinitiv Eikon showed.

"The extended stretch of US equity outperformance has likely run its course," said Candice Bangsund, a portfolio manager at Fiera Capital Corporation.

She is looking for a rotation away from growth stocks, which include technology shares trading at high multiples, into value stocks, which tend to trade at a lower price than their earnings suggest they are worth.

Many value stocks can be found in the financial, industrial and resource sectors of the Toronto market. When combined, these sectors account for about three-quarters of the TSX Composite's market capitalization.

Technology, with a gain of more than 50%, has been the top performing sector this year on the TSX, helped by a more-than doubling in the share price of Shopify Inc.

The TSX's worst performing sectors have included energy, down nearly 3%, as investors fretted about slow progress toward building additional pipeline capacity, and healthcare, which has fallen more than 13% because of a plunge in once high-flying cannabis shares.

But prospects for pot stocks could be improving as a result of the potential for Ontario, Canada's largest province, to accelerate its roll-out of retail cannabis distribution and for the United States to take steps toward the weed's federal legalization, said Robert McWhirter, a portfolio manager at Selective Asset Management Inc.

Last week, a US congressional committee passed legislation to decriminalize cannabis, taking it a step closer to being approved by the Democratic-controlled House of Representatives. The pot stocks have given technical buy signals and could be "reasonable performers into 2020," McWhirter said.