By Scotia Wealth Management - The Zukiwsky Group (Sponsored)

Market Watch – January 18, 2019

Jan 18, 2019 | 8:58 AM

Big Picture

TSX on 10-Day Winning Streak; U.S. Markets Focused on China, Global Growth

It was a lacklustre start to the week for U.S. markets, which declined mildly after disappointing Chinese economic data stoked fears over slowing global growth. Data early Monday showed China’s exports and imports both fell in December, versus a year ago, as U.S. tariffs continue to weaken demand. U.S. markets bounced back on Tuesday and Wednesday, however, buoyed by the energy and tech sectors, and optimism over news of Chinese stimulus, as Beijing announced plans to improve credit availability for smaller companies, cut taxes and speed up infrastructure investment. U.S. stocks then wavered in early trading Thursday but got a boost later from a report that the U.S. is considering easing tariffs to help calm jittery markets and aid trade negotiations. The cooling Chinese economy remains a particular concern to Germany, which saw disappointing GDP growth of 1.5% for 2018, the slowest annual rate since 2013. Elsewhere in Europe, tensions continue to mount as the British Parliament on Tuesday overwhelmingly rejected a proposed Brexit deal, prompting a no-confidence vote against Prime Minister Theresa May, which she narrowly survived on Wednesday. The turmoil over Brexit has put downward pressure on European markets, which are pricing in growing uncertainty over Britain’s exit from the EU.

Meanwhile, the TSX on Thursday extended its winning streak to 10 straight sessions, lifted in part by a recovery in energy and cannabis shares. Over the period, Canadian stocks have climbed over 6%. However, a resurgent TSX hasn’t been able to offer much help to the loonie, which in early Thursday trading slipped to its lowest in more than a week versus the greenback as oil prices slipped and domestic jobs data showed a pullback last month in hiring. Canada shed some 13,000 jobs in December, as hiring decreased in the transportation, utilities and construction sectors, according to data released Thursday.

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Sentiment Improving in North American Markets

For the four days covered in this report, the Dow gained 374 points to close at 24,370, the S&P 500 rose 40 points to settle at 2,636, while the tech-heavy Nasdaq added 113 points to close at 7,084. In Canada, the TSX continued its strong showing, climbing 272 points to end at 15,211.

Equities/Strategy

Strategy

We continue to emphasize high quality and selectivity by focusing on businesses with sustainable competitive advantages that can generate growth across a variety of market conditions. Following better-than-anticipated growth over the past two years, the Canadian economy (as measured by real GDP) is likely to expand at a slower pace (around 2%) in 2019. Aside from global macro headwinds, Canada-specific issues (lower energy prices and high levels of consumer debt combined with higher interest rates and regulatory changes on the housing market) are also likely to exert downward pressure on domestic economic growth. On a positive note the labour market in Canada appears healthy, inflation is contained, and risks of an imminent recession are low. We expect Canadian equity market volatility to remain elevated as U.S. economic momentum fades and concerns remain surrounding global trade, Canadian household indebtedness and energy prices. Despite these uncertainties, consensus estimates project 9.5% S&P/TSX Composite earnings-pershare growth in 2019. Commodity prices will continue to be a big determinant of S&P/TSX Composite performance and earnings growth, as well as the performance of the Canadian dollar, which we expect to remain range bound in the short-term. While a lot of bad news has already been priced into Canadian risk assets, we believe a cautious stance is warranted given the maturity of the business cycle. As such, we have minimal exposure to commodity price risk, maintain a tilt to high quality issuers, and focus on companies operating in oligopolistic markets.

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