Just something to think about...
Sunday, January 1, 2006 11:01 EST
TSX unlikely to burn so bright in '06
By Rachelle Younglai
TORONTO (Reuters) - The Toronto Stock Exchange swept out of 2005 to rave reviews, but this year it is unlikely to repeat a performance that exceeded expectations, even though demand for its star players -- oils and metals -- remains high.
An encore in 2006 would need energy prices to soar the way they did after Hurricane Katrina, a more composed Canadian dollar and buoyant North American economic growth.
"It's almost a naive assumption to make," said Andrew Pyle, senior economist with the Bank of Nova Scotia.
At the start of 2005, pundits were forecasting a 10 percent increase for the Toronto Stock Exchange.
Then oil prices began climbing on supply shortages and brisk demand, propelling Canada's energy sector more than 50 percent higher. Metal prices also touched multiyear highs, boosting mining companies by about 15 percent.
Those two factors, and an announcement by the federal government that it would cut taxes on dividends and leave the popular income trust structure unchanged, helped carry the S&P/TSX composite index <.GSPTSE> to a 22 percent gain for the year.
That rise followed a 12.5 percent gain in 2004 and a 24 percent increase in 2003. The TSX closed at 11,272.26 points on Friday.
"We have more than doubled that (2005) outlook and we have done that on the back of some very strong energy and commodity prices, and not without a lot of other good news," said Michael Sprung, president of Sprung & Co Investment Counsel. "I don't see how it can continue."
A stronger Canadian dollar, fears that the U.S. economy will wane, and weaker oil prices could all conspire to rein in Canada's main stock exchange.
"I think the biggest risk to Canadian equities (in 2006) is that we see a more aggressive spike higher in the Canadian dollar, which does put pressure on earnings and obviously competitiveness," said Pyle.
Key exporters, like the manufacturing, resources and forestry groups, are hurt by a stronger currency, which makes their products more expensive for foreign buyers.
Pyle said that if the Canadian dollar pushes above 90 U.S. cents early in 2006, a wider range of companies will have a harder time penetrating export markets. And firms that are able to move their products are likely to see their earnings crimped.
The currency finished at C$1.1630 to the U.S. dollar, or 85.98 U.S. cents on Friday, up 3.2 percent on the year.
The fear of an economic slowdown in the United States, Canada's largest trading partner by far, also clouds the broader outlook.
According to the latest data, sales of existing U.S. homes fell, indicating the rally in the U.S. housing market has begun to wane.
"I think there are large inflationary concerns starting to creep into the market. Consumer debt is at all-time high levels, mortgages outstanding are huge and with the burden of additional expenses coming through in the way of inflation, it could put some real pressure on making those mortgage payments," said Sprung.
"If their economy turns down -- 80 percent of our trade is with the U.S. -- it's certainly going to affect us, particularly Ontario and Quebec, in a major way."
Barring natural disasters like Hurricane Katrina, which cut back oil and gas production in the U.S. Gulf of Mexico, many market watchers believe oil prices will level out in 2006.
"All in all, you are dealing with a finite commodity and the voracious appetite that China and India have for energy should help put some kind of floor under the price," said John Kinsey, a portfolio manager with Caldwell Securities Ltd.
"That will still auger well for Canadian commodity stocks, it's just that we're not going to get the doubles and triples that we have seen in the past."
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