MARKET ACTIVITY/TRADING NOTES FOR DAY ENDING FRIDAY, JANUARY 2, 1998 (4)
LOOKING BACK AND AHEAD - 1998
Hedged Forecasts See More Gains
Globe & Mail
ALL good things must come to an end, right?
Of course. But not just yet, according to many stock market watchers.
As hard as it may be to believe after three consecutive years of double-digit returns, it seems that most market professionals are looking for another year of good, though perhaps not spectacular, gains from the Canadian equity market.
Now, as any savvy stock picker is wont to do, the forecasts are safely hedged with all sorts of caveats, most significant among them the fallout from the economic turmoil that's gripping most parts of Asia.
That, more than anything else, could be the spoiler this year and injects a new and somewhat troubling element of risk in the global outlook for equities, analysts said. It's also expected to continue to make the market action volatile.
A recent poll of market watchers by Reuters news service forecast that the Toronto Stock Exchange 300-stock composite index will hit 7,800 by the end of 1998, up about 16 per cent from Wednesday's close of 6,699.44. That's in line with the "house call" from a number of major investment dealers, including Midland Walwyn Capital Inc. (7,800) and ScotiaMcLeod Inc. (7,700).
The latest results from Report on Business's Bulls v. Bears sentiment survey yielded a more mixed result: a 50-50 split between those expecting a higher TSE 300 in six months and those calling for a drop.
And, as usual, there are always a few bears lurking in the bush. L‚vesque Beaubien Geoffrion Inc.'s chief strategist Cl‚ment Gignac has a 12-month target of 6,000 for the TSE 300 and 7,000 for the Dow Jones industrial average, declines of about 10 per cent and 11 per cent respectively.
The comforting element of the market outlook is definitely the Canadian economy. While a marked slowdown in the Asian economies will hamper growth, Canada's gross domestic product (GDP) is still forecast to increase by more than 3 per cent this year.
That's expected to translate into tidy gains in earnings for big Canadian corporations. According to a recent Midland Walwyn report, the consensus earnings estimate for the TSE 300 for 1998 is $394, a 28-per-cent increase over the forecast of $308 for 1997. (The TSE 300 earnings estimate is the total of all the per share earnings estimates of the companies in the index.)
Add to that a benign inflation picture -- currently running at an annualized rate of about 1.6 per cent -- and you've got a nice backdrop for equity markets. While the interest rate outlook has been clouded by recent short-term hikes in defence of the swooning dollar, few analysts are expecting sharply higher rates this year.
Ditto for the United States, which sets the tone for the world equity markets. U.S. GDP is forecast to rise about 2.5 per cent in 1998. Despite the fact that the U.S. economy has been steaming along for seven consecutive years, inflation remains stubbornly low as do interest rates, key underpinnings of the bull market that has propelled U.S. stock prices more than 100 per cent over the past five years.
The Asian crisis is expected to have a modest chilling effect on the U.S. economy, but even that's seen as a part blessing because it decreases the odds of the U.S. Federal Reserve Board jacking up interest rates to slow growth to keep inflation at bay. Earnings for Standard & Poor's index of 500 companies are expected to rise 7 per cent in 1998, according estimates from IBES International Inc.
Still, the so-called Asian flu, which kicked in last summer with a debilitating round of currency depreciations, is the wild card in the 1998 deck. The Far East economies represent both key markets for Canada's exporters of natural resources and, as a block, one of fastest growing regions in the world over the past decade. How deep the slump will be, and the speed of the recovery by economies in that region, could throw all assumptions about 1998 out the window.
"I think Asia will have a more significant impact on the North American economy than has been anticipated," L‚vesque's Mr. Gignac said.
Other analysts aren't as concerned. "Mid-year, we felt in many ways that conditions were as good as they have been in Canada in a generation and I certainly don't see any reason that has changed," said Dunnery Best, a senior vice-president at Midland Walwyn.
Asia's woes have already had a profound impact on the Canadian stock market. Demand and prices for key Canadian exports such as base metals and forestry products in Asia have weakened as the Far East economies wind down.
The result: Natural resource stocks took a thrashing last year. The disinflationary impact of the Asian slowdown was one of a host of factors that undermined the already languishing gold sector. It was only the sterling performance of the interest rate sensitive groups -- banks, pipelines and utilities -- that lifted the TSE to a decent performance in 1997.
While few market watchers are advising that investors stampede into commodity stocks at the moment, most acknowledge that there is compelling value among the battered cyclical stocks, some of which are trading at valuations not seen as low since the last recession.
Once these sleepers awaken, the gains could come hard and fast. "I don't see a snap back as quick as we saw down, but the values are so cheap that if you look at it from a two-year perspective there are many stocks there that could double or triple," said Josef Schachter, president of Schachter Asset Management Inc. in Calgary.
So one of the trickier questions for money managers this year -- and the one that may separate the wheat from the chaff -- is at what time should investors pile back in to the cyclicals.
ScotiaMcLeod is entering the year with a heavy emphasis on interest rate sensitive issues, particularly banks, in the brokerage's model portfolio. But the firm's research director, Diane Urquhart, said they will be keeping a careful eye on the commodity plays for signs of a change in sentiment.
"I think at some point we are going to have to aggressively move from the interest sensitives to the resources and energy, so it's going to be getting that timing right, determining when we have hit the bottom," she said. Here are some forecasts:
Craig Strachan, manager of research services, TD Evergreen.
Mr. Strachan said his firm is trying to "guide" its clients expectations lower after several years of above-average gains. Slower earnings growth by Corporate Canada will be the key dynamic driving the market. "Asia really provided an excuse more than anything to re-examine earnings, and I think analysts will use that to trim their earnings forecasts."
Ron Meisels, president of P&C Holdings in Montreal.
Mr. Meisels, a technical analyst, was among the more bullish market watchers polled for this informal survey. He's sticking by his forecast of "10,000 in 2000" for the TSE 300 and thinks 1998 could surprise jittery investors. He believes the correction in the third quarter, which took the TSE 300 down more than 10 per cent from its October highs, was a healthy blowoff for the market. "We could very well have exhausted and completed a cycle with that selloff and, therefore, a case could be made for the market to burst out to all-time highs and for 1998 to be another very bullish year," he said.
Cl‚ment Gignac, market strategist for L‚vesque Beaubien Geoffrion.
"I classify myself in between cautious and pessimistic," said Mr. Gignac, who is forecasting a 6,000 TSE 300 and 7,000 Dow in 1998. He turned bearish in early 1997, primarily over a concern about the potential for rising interest rates.
The Asian crisis has removed that threat, but only to replace it with another one -- a slowdown in earnings, which Mr. Gignac believes will be steeper than most market watchers anticipate. Asia has provided 55 per cent of global growth over the past six years, so "that suggests to me that we will have a serious slowdown in the North American economy."
Midland Walwyn.
The firm is maintaining its 50-per-cent weighting in stocks, 40 per cent bonds and 10 per cent cash going into 1998, with a target of 7,800 for the TSE 300. "Until we see compelling evidence either that inflation is a real threat, or that earnings-growth expectations are unrealistic, we will remain fundamentally optimistic that Canada's recovery is intact, and that high-quality equities will continue to provide investors with superior returns," it said in a recent report.
ScotiaMcLeod.
It has a 7,700 target for the TSE 300. The brokerage sees interest rate sensitive stocks continuing to provide leadership in the Canadian market, in particular the bank sector. They continue to be "deeply underweight" natural resource stocks pending signs that the worst of the Asian crisis has run its course. ScotiaMcLeod expects little threat of significantly higher inflation or interest rates.
HOW THE MARKETS FARED
Dec. 31, 1997 Close And % Change From Dec. 31, 1996
Canada
TSE 300 Composite 6,699.44 +13.0%, Toronto 35 359.34 +14.0%, Toronto 100 406.27 +12.8%, Toronto 200 404.87 +13.8%, Montreal Portfolio 3,404.46 +15.3%, Vancouver composite 618.48 -48.0% and Alberta 2,239.86 -13.2%.
United States
Dow Jones Industrial 7,908.25 +22.6%, S&P 500 970.43 +31.0%, Nasdaq 1,570.35 +21.9%, Amex and 684.61 +19.6%
Europe
London, FT-Se 100 5,135.50 +24.7%, Frankfurt 4,224.30 +46.7%, Paris 2,998.91 +29.5% and Milan 24,942.00 +58.9%.
Asia
Nikkei 225 stock 15,258.74 -21.2%, Hong Kong 10,722.76 -20.3%, South Korea 375.15 -42.4% and Thailand 372.69 -55.2%.
Latin America
Mexico Bolsa 5,228.45 +55.6% and Brazil 10,196.55 +44.8%
TSE Index Returns, (not including reinvested dividends)
Financial services +51.5%, Pipelines +43.5%, Utilities +37.5%, Transportation and environment +31.4%, Communications and media +28.1%, Merchandising +23.5%, Industrial products +21.0%, Conglomerates +20.2%, Real Estate +17.8%, Consumer products +5.8%, Oil and gas +2.8%, Paper and forest -12.8%, Metal and minerals -27.6% and Gold and precious minerals -43.6%.
GOOD YEAR FOR MARKETS, BUT THE BULL STUMBLED
Canadian Press
It was the year the bull market stumbled under the weight of its own global girth.
It started with a slight limp in the summer as speculators chipped away at overvalued currencies in Asia. Before long, the so-called Hong Kong flu had spread to the West.
On Oct. 27, 1997, North America's beefy financial markets were upended amid a panic-driven selloff that led to the biggest point losses in history.
"Charcoal Monday was a very strong reminder that we live in a global economy," said Patricia Croft, portfolio manager at Sceptre Investment Counsel in Toronto.
In New York, the Dow Jones industrial average - pumped up by hefty corporate profits - charged ahead for the third consecutive year, gaining 22.6 per cent in 1997.
That's about four percentage points behind the blistering pace set in 1996. And the Dow - which closed Wednesday at 7,908.25, down 7.72 points - remains more than 300 points below its all-time closing high of 8,259.31, reached Aug. 6.
The Toronto Stock Exchange, which accounts for more than 80% of all stock trading in Canada, also put in a strong performance in 1997. However, slumping commodity prices later in the year - particularly for gold - slowed the advance. The TSE 300 stock index has added 11.53%in value so far this year, compared with a robust 26% gain in 1996.
The TSE closed at 6,699.44 Wednesday, more than 500 points below its all-time high - 7,223.42 -reached on Oct. 8.
RECORD YEAR FOR ASE
BRE-X DEBACLE HURT VOLUMES, BUT EVERYTHING ELSE WAS ROSY
The Alberta Stock Exchange will be sailing strongly into the New Year after racking up record levels of members, listings, new listings and financings in 1997.
"Things look quite positive. I'm generally pleased with the state of the exchange," ASE president Tom Cumming said yesterday in the dying minutes of the 1997 trading year.
Canada's most prominent junior stock exchange, known around the world for its unique junior capital pool program, had 219 new listings, substantially up from 161 in 1996, a 36% increase.
He said the outlook for new listings in the New Year looks extremely positive.
"The new listing applications are coming in at unprecedented rates still," Cumming said, adding that the ASE has about 50 new listings in the mill that have received a conditional approval.
"They're ones that really meet our criteria, we're just waiting for some odds and ends to come in on them and probably 90% of them will ultimately be listed."
Total listings climbed to 998 from 868, a nearly 15% increase over the year.
Financings, a key indicator not only of the state of the regional economy but of the health of the exchange and ASE companies, hit a new record high.
"Financings quite often are how exchanges do compare themselves (by seeing) what sort of money you're able to raise - that's why companies list," Cumming noted.
The 1997 total for companies listed solely on the ASE was $1.25 billion, Cumming said, sharply higher than the $851 million the exchange recorded a year ago.
"That's gone up quite significantly, 47 percent."
Trading volume and value levels eased in 1997 after five years of successive records.
Cumming said that wasn't a surprise in the absence of Bre-X Mineral Ltd. as a listed stock and the malaise of the junior mining sector in the wake of Bre-X's disgrace as an unprecedented fraud.
Volume fell 4.9% to 3.9 billion shares from 4.1 billion shares in 1996.
"That's the end of five successive years of record growth, and it's just off a little bit," said Cumming.
The value of trading fell 35% to $3.9 billion from $6 billion in 1996.
"That's related to our good friend Bre-X probably, because of the price it traded at," said Cumming.
"It really restores the traditional dollar per share average we've had over every year but '96, which was a bit of an anomoly when the mining companies were going crazy," he added.
"Mining companies seem to trade at peculiar multiples, whether they have reserves or not."
Cumming noted weakness in the secondary financing markets began to emerge in the latter months of 1997, something he and exchange officials will be watching carefully.
"It will be interesting to see how it rolls into the new year," said Cumming, who added it could cause problems if the trend becomes too strong.
"New companies won't go public because they won't be able to raise that next tranche of capital, which is what all junior companies need."
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