Equities will outperform bonds next year, but be somewhat volatile in the next couple of quarters, says CIBC World Markets.
“Our top-down leading indicator model, which translates trends in Canadian and U.S. GDP growth, oil prices and other key variables into forward earnings, projects a modest 6% growth rate for year-on-year earnings in the coming four quarters, well below the double-digit consensus,” says CIBC chief economist Avery Shenfeld.
“That would put the composite index at a lofty 20 times forward multiple, if you substitute our model’s earnings projection for the bottom up consensus. While that’s heavily tilted towards huge multiples on energy stocks, the market’s path could still see-saw as earnings downgrades for 2015 trade off against economic hopes for the following year.”
He expects an 18% increase in 2016 earnings, lifted by improved global growth, firmer prices for oil and lumber, and improved Canadian economic performance.
Shenfeld doesn’t see much change for the Canadian dollar, calling for it to drop a few cents after the first Fed hike, then recovering modestly. He also expects the Bank of Canada to stand firm on interest rates.
“Governor Poloz’s optimistic forecast for the next six quarters repeatedly cites the underpinning of a softer exchange rate,” he says. While another ease is very much on the table, if the Fed actually hikes by September, the Bank of Canada will be relieved of the burden to cut again as the loonie weakens. Keeping the Canadian dollar range bound as oil recovers will see the Bank of Canada stay on hold right through the first half of 2016.”