CIBC Capital Markets’ head of portfolio strategy says he is optimistic about the S&P/TSX Composite Index based on three factors, including the exchange’s exposure to gold, a weaker Canadian dollar and borrowing costs moving lower.
In an interview with BNN Bloomberg Tuesday, Ian de Verteuil said the performance of the TSX is largely a “reflection of the Canadian economy,” as many of the companies listed on the exchange have a lot of international operations. He said around 40 to 50 per cent of the revenues generated by firms on the TSX were done so in Canada.
“Another one of the key variables that has helped the TSX and probably will continue to help the TSX is the strength in gold prices. The TSX has become the de facto home of gold companies anywhere in the world. If you are a gold investor. You have to invest in companies on the TSX,” de Verteuil said.
He highlighted that with the Canadian dollar weakness, consumers have less purchasing power, but many companies on the TSX get a “bit of a headwind” from translating earnings in foreign currencies back into Canadian dollars.
On the exchange rate between the Canadian and U.S. dollar, he said he don’t see much room for strengthening or weakening.
“From the fall right through to the start of the year, we really saw the Canadian dollar decline vis a vis the U.S. dollar from about 74 to 75 cents to below 70 cents. So that we would expect maybe the Canadian dollar probably has experienced the worst of its weakness, and that’s simply because…we’re starting to see the U.S. show signs of weakness,” he said.
Often when the U.S. dollar is weak, de Verteuil said the Canadian dollar is strong, but under the current circumstances the Canadian dollar weakened first followed by the U.S. dollar moving lower.
“So we’re seeing Canadian competitiveness vis a vis the euro and the U.K. actually start to improve, and we have a number of companies that actually get the benefits from those things,” he said.
Lower boring costs could also help the TSX, de Verteuil noted.
“Interest rate differentials are an important element simply because if you can clip higher coupons and earning U.S. dollars versus Canadian dollars, that puts pressure on it,” he said.
“So we do expect more rate cuts, I think over the course of this year, but what we’re also seeing is a U.S. economy that is not doing as well as individuals would like.”
