The Toronto Stock Exchange stuck in a rut? – Lachman Balani

Most Canadians have the majority of their investments (RRSP,TFSA,  non-registered money) in either GICs ,mutual funds, segregated funds, ETFs or the stock market.

Most of the investments by Canadians into the equity markets through mutual funds, segregated funds, ETFs, equity linked GICs or directly into the stock market are usually into the Canadian stock market.

The major exchange in Canada, the Toronto Stock Exchange, is primarily driven by oil, metals and financials. Let us examine each one of these in turn

1. Oil: The general consensus is that nowadays the pivotal rate of oil is the price where US shale oil makes a marginal profit, which many mavens have pegged at USD 60 a barrel. Taking that into consideration, the pundits claim that oil will oscillate between USD45-USD55 for the most part perhaps overshooting at infrequent intervals and for extremely short periods of time between the USD40-USD45 range or USD55-USD60 range. Given that scenario and that the oil price currently trades in the USD 45- USD 50 range that does not leave much room on the upside for the rest of the year.

2. Metals: The prices of these commodities whether they be precious metals like gold and silver or base metals like copper, zinc or nickel was driven mainly by the stupendous demand from China’s exponential growth, which has since subsided leading to a paring of prices. China is not likely to see a dramatic increase in its economy this year so as to increase the prices of metals. Fiscal stimulus in other countries in the form of infrastructure spending will not take care of the super slack from China. The only hope for increases in prices of metals is the promised infrastructure rebuilding in the US and its effect will not trickle into Canada’s stock market till perhaps next year.

3. Financials. This is the last frontier that was contributing to the slight rise of the TSX this year. Last week a major ratings agency, Moody’s, downgraded all the banks due to the large consumer debt (167% of the consumer income) and the frothy housing market in certain pockets of Canada. According to some experts the troubles of a certain mortgage lender also had something to do with their decision but others say that the particular company experiencing issues only represented a miniscule 1% of the Canadian mortgage market and shouldn’t roil the other lenders. Nonetheless the banks have been downgraded. However the immediate effect of decreasing their stock value may not be long lasting.

Theoretically, the above 3 points mean that this year there will not be much of an upside in the TSX (or TMX as it is concurrently known as) .The TSX may trade up and down from its closing level of 15543.33 on May 16, 2017 in a narrow range.