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National Bank Financial blames weakness in the resource sectors and companies’ recent inability to meet earnings expectations for the underperformance of the S&P/TSX composite index.

OTTAWA — The Canadian stock market has been one of the worst places to invest in 2012 and, despite improving valuations, that weakness could linger on, warns a research report Tuesday from National Bank Financial.

The report blames weakness in the resource sectors and companies’ recent inability to meet earnings expectations for the underperformance of Canada’s S&P/TSX composite index.

The S&P/TSX 60 index, comprising the 60 highest-capitalization stocks on the broader index, ranked 21st on the list of developed country indexes with its 0.7 per cent year-to-date return. Only Spain’s Ibex 35 and Portugal’s PSI-20 indexes delivered worse returns.

And when ranked among commodity-producing countries, Canada was the worst performer of all, eighth on a scale of eight.

The heavily weighted energy and materials components of the TSX composite index exerted a considerable drag on the overall index performance, as resource issues have suffered against a background of weak global growth. Of 10 TSX sub-indexes, energy stocks came in ninth with a loss of 5.42 per cent year-to-date and materials in tenth spot, off 5.58 per cent, the report notes.

The market was also hurt by companies having to revise down earnings-per-share forecasts in 2011 and 2012.

But despite equity valuations now trading below their 10-year average, "current price weakness may persist until markets experience some catalyst to turn the current trend around," said Marco Letieri of National Bank’s economy and strategy group.

"Potential triggers include a significant push of stimulus from Chinese policy-makers and an economic environment leading to a weakening greenback."

Both may be a way’s off. An unexpected trade surplus reported by China on Tuesday was regarded as a further signal the economy is undergoing a mild retreat, as opposed to the kind of hard landing that would prompt authorities to act aggressively.

Meanwhile, another round of quantitative easing by the U.S. Federal Reserve or solid signs of global growth — factors that could drive the U.S. dollar lower — remain uncertain.

- Financials: Have the challenge in 2012 of meeting the highest expectations for earnings growth of all the TSX sub-indexes, at 14.3 per cent. Much will depend on housing activity, for the banks, and bond yields, for the insurers, Letieri said.

- Metals stocks: Are at risk if the current slowdown in global growth results in weaker demand for industrial metals.

- Gold stocks: Despite a 50 per cent pop in bullion prices since 2010, gold stocks have performed poorly. But with the ratio between gold stocks and prices at a multi-year low — the same level reached in the market bottom of 2008 — investors are now wondering if the equity issues are soon to play catch up.

- Energy stocks: Have also underperformed despite rising crude prices. But prices for Canadian oil prices are trading at a significant discount to Brent, the global benchmark, due to oversupply issues at key North American oil hubs. Those bottlenecks are expected to remain a problem at least into the end of the second quarter this year, National Bank says.

http://www.edmontonjournal.com/business … story.html

Statistics: Posted by yoda — Tue Apr 10, 2012 3:14 pm