* Strategists warn Toronto stocks could fall another 7 pct
* Market expected to repeat mid-year selloff of 2010, 2011
* 2011 low of 10,848.19 seen as potential bottom
* Euro crisis, China slowdown threaten resource sector
* Many expect late-2012 recovery, gains over one year
By Jon Cook
TORONTO, May 13 Canadian stocks, which slumped
to a 2012 low last week, are likely to suffer further losses in
the coming months as Europe's debt woes move back into the
headlines and China's economy struggles to maintain momentum.
Market watchers warn the benchmark Toronto Stock Exchange
S&P/TSX composite index could easily revisit its 2011
low, giving credence to the old market adage "sell in May and go
"The lows of last year are a reasonable barometer of where
we might go," said George Vasic, chief economist and strategist
at UBS Securities Canada Inc. "We had a pretty solid fear factor
Last week the Toronto Stock Exchange's S&P composite index
hit a 2012 low of 11,555.08 as it fell for six
straight sessions. It was the index's worst skid since falling
for seven consecutive trading days in May and June of last year.
The first leg of the weakness was triggered by the second
soft U.S. jobs report in as many months. But selling picked up
after European elections in which France turned sharply to the
left and Greeks gave more support to anti-austerity parties,
threatening a painfully constructed bailout package.
The losses echoed a year-earlier drop that ultimately sent
the TSX index to a 2011 low of 10,848.19 in October. That move
was also triggered by Greek and other euro zone debt problems.
Markets only recovered after the European Central Bank
flooded the region's shaky banking sector with cheap short-term
loans. Encouraging U.S. economic data and a U.S. Federal Reserve
pledge to keep interest rates near zero until 2014 later helped
push the TSX to a 2012 high of 12,788.63 in February.
Toronto's main stock index, which closed at 11,694.67 on
Friday, i s now down more than 8 percent from that high, m aking
the Canadian market one of the world's worst performers this
year. An alysts warn it could correct a full 10-15 percent.
"Somewhere in the low 11,500s should be the technical
bottom," said Barry Schwartz, a portfolio manager at Baskin
Financial Services. "If it gets lower, then we're heading into a
The push lower could come from China. Analysts warn poor
trade numbers and a weak reading of industrial growth have made
it more likely that the world's top commodities consumer is
headed for a hard landing.
"As we see the Chinese economy slow from 11 percent over the
past decade down below 8 percent, we're seeing the negative
impact on commodity prices and thus on the Canadian market,"
said Craig Fehr, Canadian market strategist at Edward Jones in
The sectors of the TSX most sensitive to growth, resource
shares, are seen as the most likely to lead market declines.
Energy and mining stocks are already 2012's worst performers.
A drop in U.S. crude oil prices to around $96 a barrel from
its yearly high of more than $110 in March has sent the TSX's
energy sector plunging ne arly 9 pe rcent. Energy stocks
suffering double-digit declines include Talisman Energy Inc
and Canadian Natural Resources.
"The biggest risk on the resource side is the oil price,"
said Paul Hand, managing director at RBC Capital Markets.
Materials stocks, which include miners, have done even
worse, shedding more than 1 4 p ercent since March. Gold-mining
shares have helped lead the decline, with even such major names
as Barrick Gold and Goldcorp Inc off sharply.
"If you look at metals and gold stocks, they've all been
crushed," Hand said.
RECOVERY SEEN WITHIN YEAR
While short-term prospects are ugly, analysts said the
losses could be short-lived, with many expecting the market to
recover after the uncertainty of the U.S. elections ends in
"From these levels, you can see 10, 15, 20 percent tacked on
really easily if you have any type of resolution on the
political side in the U.S.," said Arthur Salzer, chief executive
officer at Northland Wealth Management.
In Reuters poll of 32 market watchers conducted at the end
of March, the median forecast predicted the TSX would climb to
13,275 by year's end. While many have since pared back their
targets, there are still expectations of a recovery.
"We're certainly constructive on the global growth story
over time, and Canada is uniquely and very favorably positioned
for that trend," said Fehr. "It's also the exact same trend that
is pushing the Canadian markets lower now."
Still, veteran market watchers warned investors shouldn't be
too smug, with the volatility of recent years showing Canada's
cyclicals-heavy stock market can fall steeply in a crisis.
"Saying something is cheap is by no means any assurance that
it won't go down further," Vasic said.