Jan. 4 (Bloomberg) -- Canadian stocks will rebound from their 11 percent slump in 2011 as the economy strengthens this year, strategists at Royal Bank of Canada and Desjardins Securities said today.
Myles Zyblock, the chief institutional strategist at Royal Bank in Toronto, raised his six- to nine-month view of Canadian equities to “above-benchmark” from “market-weight.” Ed Sollbach of Desjardins Securities Inc. forecast the Standard & Poor’s/TSX Composite Index will climb to 14,200, which would be a 19 percent increase from its close Dec. 30.
“Financial strains are moderating and the economic outlook is showing some early signs of improvement,” Zyblock wrote in a note to clients today. “These developments should generate lift for valuation multiples and support further gains in the equity market.”
Canada’s benchmark stock index lagged behind the S&P 500 in 2011 for the first year since 2003 as producers of raw materials and energy dropped on concern the European debt crisis will limit demand for commodities. The industries make up 48 percent of Canadian equities by market value, according to data compiled by Bloomberg. Zyblock said manufacturing surveys in North America, Europe and China indicate a stabilizing economy.
Investors should buy Canadian industrial stocks, such as railroads, which will benefit from economic growth, and sell utilities as government-bond yields stop falling, Zyblock wrote.
U.S. expansion will help Canadian stocks rebound from historically low levels relative to earnings, Sollbach said in a note to clients. The S&P/TSX trades at 14.8 times earnings, compared with a 10-year average of 18.7. The U.S. accounted for 75 percent of Canadian exports in 2010, according to Statistics Canada.
“Stocks appear extremely undervalued,” Sollbach, who is based in Toronto, wrote. His unit is part of Montreal-based Desjardins Group. “Stock prices will be driven mainly by multiple expansion as fears of a U.S. recession fade.”
Sollbach, who forecast a year ago the S&P/TSX would rally in 2011, recommended a mix of fast-growing companies and less- volatile equities that pay dividends, such as utility, phone and pipeline stocks. Dividend-paying companies should continue to benefit from low bond yields, he wrote.
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