EQUITIES COMMENT – “Oh! What a Quarter”
After a rocky start to the year, the TSX Composite ended up having its best quarterly return since 2014 and was one of the top performing stock indices in the world. The TSX earned 4.5% including dividends for the quarter but over the past year, it was still down with a loss of 6.6%. So far in 2016, the strongest sectors are Materials (mining) and Telecommunications. Materials stocks benefited from a strengthening in prices for gold and other minerals. Telecommunications stocks were rewarded for their high dividend yields and the stable nature of their businesses which are like a port in a storm for investors. The laggard was Health Care which declined 67%. Valeant Pharmaceuticals is the culprit here. The company is dealing with serious problems including delayed release of financial statements, a high debt load, executive turmoil, investigations by the U.S. government and the SEC, to name a few!
Both the U.S. S&P 500 and the international EAFE index had lower returns than the TSX for the quarter at -4.9% and -9.6%, respectively. Less commodity sensitivity and an increase in the Canadian dollar hurt returns on foreign investments. For the last twelve months however, these indices are ahead of the TSX at 4.4% (S&P 500) and -5.9% (EAFE).
Our research continues to indicate the TSX could reach 14,200 over the next year. We reduced our earnings estimate and target for the TSX in January and we continue to believe it is conservative. However, should oil rebound faster than expected, our forecasts could be too low. The likelihood of “lower for longer” interest rates provides valuation support to stocks, especially those with sustainable and/or growing dividends.