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Canadian Stocks Likely To Outperform In 2014: CIBC

Stocks in this article: CM

Gains driven by less stretched valuations and more leverage to the global economy

TORONTO, Jan. 14, 2014 /CNW/ - Canadian stocks are likely to outperform American stocks in 2014, finds a new report from CIBC World Markets Inc.

"After being trounced by New York - and Europe and Japan for that matter - in 2013, Toronto stocks entered the year with less stretched valuations, and greater potential for earnings gains that will pay off in outperformance in the year ahead," says Avery Shenfeld, Chief Economist at CIBC.

Mr. Shenfeld, who co-wrote the report with CIBC Senior Economist, Peter Buchanan, notes that Canadian stocks also have more leverage to a rapidly heating global economy than do their U.S. counterparts.

In its most recent forecast, " Outlook 2014: Give Low Rates a Chance", CIBC economists call for 2014 to be the first year since 2010 in which global growth surprises on the upside. They are calling for growth to run at a four per cent pace, about a half-point above current consensus or International Monetary Fund expectations.

Historically, years in which global growth ran at four per cent or better were big winners for the cyclically weighted Toronto Stock Exchange, producing median returns well above the S&P 500. Mr. Shenfeld notes that the "TSX has outperformed the S&P in each of the last six years in which global growth has topped four per cent and 2014 should add to that streak.

"That reflects the heavier weighting in Toronto's benchmark towards resources sensitive to global activity. To this point, sluggish activity has held back demand, in a period in which supply was expanding in such areas as natural gas, oil and base metals. Little wonder, then, that the resource sector has been largely responsible for a disappointing earnings recovery of late, offsetting steady gains elsewhere in the index."

However, he believes the increases in supply for oil, natural gas and metals are already well priced in. "What isn't, is the pressure from demand associated with pleasant surprises in global economic activity," adds Mr. Shenfeld. "That should have oil prices steady but oil futures trading at much less of a discount than now in the curve. Natural gas could hold onto recent gains, while base metals and lumber move higher."

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