Today might not be the best day to talk about a bullish outlook for Canadian stocks. The Toronto Stock Exchange's S&P TSX closed on Friday, down 2.1%, its biggest decline since November and its lowest close since March 1.
Today is shaping up to be another rocky ride with stocks and commodities tumbling as investors added to the long list of worries about China's worsening COVID outbreak.
Here s why Bank of America is bullish about Canadian stocks.
The New Energy World Order is an important factor in the growing importance of energy security. Strategists Ohsung Kwon, Savita Subramanian and Stephen Suttmeier argue that Canada has political stability because it has commodities and that it is able to gain in a big way.
Nearly 30% of the TSX is commodities, compared to 7% of the S&P 500. Canada exports most of the things that have been made scarce by the Ukraine war. It is the fourth largest net exporter of oil and the fifth largest agricultural exporter. BofA said that it produces a host of metals and minerals that are now facing shortages.
BofA says higher commodity prices are good for the economy. It sees Canada's GDP growth be among the strongest this year and 3.1% in 2023, above the United States, which they believe will grow 3.3% this year and 1.8% next year.
Canada has a lot going for commodities, and that is something that Canada is going to do with it. Financials are the biggest sector of the TSX, representing more than a third of the index. BofA believes Canadian banks will reach 3.5% by mid- 2023, given the rising rate of the Bank of Canada.
Canada should be a key beneficiary of the peak globalization, as supply chains shift to the Western Hemisphere.
The strategists said that the TSX currently trades at the steepest discount on a fwd P E basis compared to the S&P 500 since the Tech Bubble. They expect this to narrow due to the TSX's better earnings revisions, better inflation protection, better EPS growth and better dividends.
BofA predicts 23% EPS growth for the TSX, compared to 6% for the S&P 500.
There are always risks. The global economic downturn is the biggest. The TSX, which has historically shown higher volatility of earnings than the S&P 500, is more vulnerable to an economic downturn.
Another risk is over-tightening by the Bank of Canada. If the central bank is more hawkish than the U.S. Federal Reserve, it could lead to U.S. stocks outperforming Canadian stocks, they said.
The strategists highlight 19 Canadian stocks rated Buy with an implied upside of 21%.