BAY STREET-Rising TSX seen at risk of near-term pullback

Sun Feb 17, 2013 5:29am EST

* Toronto market seen vulnerable to looming global threats
    * Resource stocks could be hit especially hard
    * Analysts still seen main index rising by yearend

    By John Tilak
    TORONTO, Feb 17 (Reuters) - 
The Canadian stock market looks set for a near-term pullback
after a rally that took it to 18-month highs, and resource
shares are likely to be especially vulnerable to fresh worries
about the global economy.
    The triggers for a selloff may include renewed concern about
the European economy or the U.S. battle over the federal budget,
two themes that dragged on equity markets throughout 2012.
    Strategists and fund managers said earnings setbacks and
disappointing outlooks from major companies could also spur
investors to reconsider their recent optimism.
    "We're in a near-term window for price correction in global
markets," said Myles Zyblock, chief institutional strategist and
director of capital markets research at RBC Dominion Securities
Inc. "Nothing goes up in a straight line, so we're at a
high-risk entry point."
    The Toronto Stock Exchange's S&P/TSX composite index
 hit a 2013 high of 12,895.28 on Jan. 30, its strongest
level since August 2011, and above many analysts' mid-year
targets.
    The index is up 2 percent so far this year and more than 13
percent from the lows of 2012.
    Canadian stocks have benefited from a rally in global equity
markets, which has prompted talk of a "great rotation" of money
out of bonds and into higher-risk stock markets. Yet many think
the move has gone too far for now.
    "We are susceptible to a correction, given the magnitude of
the run that we've had for equity markets," said Sid Mokhtari,
market technician and director, institutional equity research,
CIBC World Markets.
        
    EUROPE FORGOTTEN, BUT NOT GONE
    Strategists said the resource-heavy TSX composite may be
more vulnerable than the high-flying S&P 500 index to
hiccups in the global economy's fragile recovery. 
    The TSX, while outperforming the S&P 500 for most of the
past decade, trailed the U.S. index in both 2011 and 2012. The
S&P is up nearly 7 percent so far this year and has gained more
than 13 percent since its November lows.
    Energy, mining and other natural resource companies make up
more than 40 percent of the benchmark Canadian index, linking
its fate closely to volatile commodity prices and the global
economic outlook.
    "Long-term investors should certainly be prepared for
short-term volatility at a minimum and even a pullback," said
Craig Fehr, Canadian market strategist at Edward Jones in St.
Louis, Missouri. "Maybe the most swift knee-jerk reactions in
the market would be precipitated by some of the headline risk
that could come from Europe."
    The European economy, which has been a major negative
influence on global markets since 2008, is still in recession,
and some investors are already fretting about the outcome of the
Italian election later this month.
    Canadian equity investors were given a harsh reminder of
this on Thursday, when data showing the economies of German and
France shrank more than expected late last year sideswiped the
Toronto market. 
    The United States, Canada's biggest trade partner, is
another source of worry. President Barack Obama and
congressional Republicans have yet to resolve the budget battle
over the so-called sequester, the package of automatic spending
cuts scheduled to take effect at the beginning of March.
    "The dysfunction in the political side is still weighing on
the market," said Gregory Nott, chief investment officer,
Russell Investments Canada. "The market is still vulnerable to
any negative surprises."

    ENDING YEAR HIGHER
    But most strategists still expect the TSX to end the year
higher as economic worries recede and earnings slowly improve.
    China's impact on commodity prices makes it an influential
factor on the Canadian index, and recent positive economic data
from China has improved market sentiment.
    "With China seemingly engineering a soft landing rather than
the hard landing, you've seen a dissipation of fears that
commodities will fall sharply," said Bob Gorman, chief portfolio
strategist at TD Waterhouse.
    Gorman expects the Canadian index to rise to about 13,200 by
the end of 2013. It closed at 12,686.63 on Friday.
    RBC's Zyblock thinks the TSX composite could outperform the
S&P 500 over the year as a whole, after lagging the last two
years, helped by a more attractive valuation. The Canadian index
trades at about 15.30 times earnings, compared with 15.88 for
the S&P 500, according to Thomson Reuters data.
    "The TSX, based on traditional valuation metrics like
price-to-book and dividend yield, looks a little more attractive
at this stage than the S&P 500," he said. "You have a
combination of fundamentals and valuations working in the TSX's
favor right now."
A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

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