BUSINESS

Investors look to consumer, financials, industrials in 2015, shun oils

12/12/2014 12:28 EST | Updated 02/11/2015 05:59 EST
TORONTO - The Toronto stock market is expected to advance modestly during 2015 but with much less reliance on the energy sector after oil and gas companies sold off in a year-end rout amid tumbling oil prices.

Analysts say the lift will come from two of this year's best-performing sectors — consumer and industrial stocks — that will benefit from an improving U.S. economy, lower oil prices and a Canadian currency that has been buffeted by falling commodity prices.

"Lower oil prices end up being a massive fiscal boost and it’s going to benefit consumers and transportation companies, railways, airlines, things like that," said Paul Vaillancourt, executive vice-president of private wealth at Fiera Capital in Calgary, noting that a weaker Canadian dollar benefits industrials, lumber, and housing.

The TSX had been up almost 15 per cent year to date at mid-summer, but was on course to end 2014 barely in positive territory. At mid-December, the index was up a slight 150 points or 1.15 per cent for the year.

U.S. markets had a far better year with the Dow up 800 points or five per cent and the S&P 500 ahead nine per cent, even as the Federal Reserve wrapped up its massive program of buying bonds and mortgage-backed securities that kept long-term interest rates low.

Expectations are the Bank of Canada will move to hike rates next year after the Fed starts to increase rates for the first time since the 2008 financial collapse. But the central bank may decide to wait even longer depending on the damage caused to Canadian economic growth by tumbling oil prices.

Performance on the Toronto market varied greatly during 2014.

The TSX energy sector, which makes up about 23 per cent of the TSX, skidded almost 30 per cent for the year, reflecting a drop of over 40 per cent drop in crude prices since mid-summer as the global economic outlook darkened amid a oversupply and a decision by the organization of oil producing countries to leave production levels unchanged.

Expectations for the sector are muted this year as analysts believe oil prices still have a lot of room to fall.

"Lots of supply, weak demand, that’s a recipe for falling commodity prices," said John Stephenson, president and CEO of Stephenson and Co.

"And the places that have typically consumed it, such as the U.S., are clearly moving forward in terms of their production."

Another major pillar, the base metals sector, fell about 20 per cent and will continue to be pressured by a weak global economy and in particular, a slowdown in the Chinese economy.

But the consumer staples sector, which includes the big grocery and food companies such as Metro (TSX:MRU) and George Weston (TSX:WN), jumped 35 per cent on the expectation families will have more disposable income to spend now that gasoline prices have dropped.

"So we're seeing that reflected in consumer stocks where they have outperformed the market, certainly the energy stocks, and reflecting an environment where people are selling oil stocks, out of energy and into anything else," said Colum McKinley, Canadian equities manager at CIBC Asset Management.

"And so buying consumer stocks is part of that process, also reflecting the benefit that consumers will have from lower gasoline prices."

The industrials group ended the year ahead by almost 10 per cent, dragged down by railroad stocks that fell heavily on worries that the amount of crude being shipped by rail will be reduced. But airline stocks benefited from lower fuel costs.

A decline in oil prices and the loonie are expected to further benefit the market's consumer discretionary component, which jumped 23 per cent. The sector includes retail giants, such as Canadian Tire (TSX:CTC.A), and auto parts companies, such as Magna International (TSX:MG), that are also enjoying the benefits of surging vehicle sales in the U.S.

Financials, the biggest TSX presence with a 35 per cent weighting, are also expected to be positive after the sector gained five per cent this year. Their performance could still be crimped in 2015 year by worries about how lower oil prices will affect the Canadian economy, but Brian Belski, chief investment strategist at BMO Capital Markets, believes they still belong in investors' portfolios.

"Pristine balance sheets, steady earnings, and consistent dividend growth, not to mention historically better behaved relative to their neighbours to the south, will likely reward the sector with higher returns-on equity and multiples for years to come," he said in his 2015 market outlook.

Expectations for the TSX in 2015 are mixed. Stephenson is looking for the TSX to rise between five and six per cent while Belski thinks the TSX can end 2015 around the 15,600 level, which would add up to gain of around 14 per cent.

The outlook for U.S. markets is more optimistic as the American economy continues to outshine that of other developed countries. Belski looks for the S&P 500 to advance by nine to 10 per cent — and that positive performance, in turn, should help Toronto's exchange.

"The U.S. economy is clearly on much more stronger footing," added McKinley. "And the Canadian stock market has always benefited from periods of strength in U.S. fundamentals."