The TSX looks “pretty attractive” to equities expert Stephen Carlin. That may surprise you, given the market’s volatility and dip from early 2018 highs, and how Canadian stocks have been laggards compared to American ones.

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“As a fundamental investor, [I] am very much focused on the prospects for earnings and earnings growth, and what drives markets higher,” says Carlin, managing director and head of equities at CIBC Asset Management, which offers funds such as the CIBC Canadian Equity Fund. During a late April interview, he said his optimism was based on analysis of these factors, even though the TSX “hasn’t been a market that has produced strong returns over the last 12 months and, in fact, year-to-date.”

To find out what’s moving markets, he adds, “We look at companies from the bottom-up […], which means looking at the earnings profile and the potential growth profile for businesses in Canada”— and what he sees today is “a pretty strong backdrop to continued earnings growth.”

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The Toronto Stock Exchange’s S&P/TSX composite index rose 6% in 2017, compared with the massive gains of between 19% and 28% for Wall Street’s S&P 500, Dow Jones Industrial Average and Nasdaq Composite. The TSX closed at 15,729.40 on May 4, trading at a similar level as this time last year (on May 8, 2017, the index closed at 15,652.08) after dropping from early 2018 highs. The Dow Jones, S&P and Nasdaq have all reported significantly higher gains in 2018.

Still, Carlin is forecasting strong earnings growth for what he calls the three big heavyweights of the TSX: energy (20% of the index), materials or mining and chemicals (12%), and financials (36%), which includes banks, diversified financials and insurance.

“I would highlight that we have oil prices today at well over $60 a barrel,” said Carlin. (WTI closed at US$69.79 on May 4 while Brent crude closed at US$75.)

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“That reflects quite positively with respect to earnings and earnings prospects for Canadian energy companies,” he explains.

Carlin also points to stronger prices for other commodities, such as copper, “which is a noteworthy commodity within the investable space in Canada.”

Energy stocks are interesting to watch, he adds, because they “can be a clear driver of improvement and investment performance.”

He describes the financial services space, which continues to report mid to high single-digit earnings growth, as the home of the “steady eddies.”

Overall, says Carlin, it’s the “TSX’s time to shine.”

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Another area to watch is the industrial products sector. It includes the CN and CP railway companies, which are moving more goods and getting better prices, he says. “The first quarter of this year has not been particularly robust,” he says, due to bad weather and capacity issues for CN rail.

However, “if you look at the sector longer-term and if you look at the valuation for the rail stocks, we think the rail stocks will generate attractive returns for investors through 2018,” says Carlin.


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