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  • Chaoxiang Lee
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Canadian Stocks: Yay or Nay?

2015-10-30 07:27:48

Business leaders have been more pessimistic on the overall state of the Canadian economy. Based on a survey conducted for Chartered Professional Accountants, approximately 40% of senior company managers have become less hopeful the economy will exhibit strong performance over the following year.


Last week, the Bank of Canada’s business outlook poll showed many senior company officers are expecting sales to improve over the next two months and plan to invest more to expand their businesses and hire additional employers.


The economy has struggled to emerge from the downturn it experienced this year. As of this writing, the Canadian dollar trades at 78 US cents. The S&P/TSX Composite Index has declined by about 11%, while the US stocks remain stable. And Canadians are slated to elect their next leaders Monday.


Do you think it is high time to invest in Canadian stocks?


Top-down traders have been avoiding commodities and Canada. The commodities’ poor performance reflects the slowdown of the Chinese economy which is shifting towards the domestic consumption of goods and services. The transition has affected the global demand for commodities, so is the commodity-rich country.


Strong firms are hurt by Canada’s macro reliance on commodities and resources, causing them to panic and close out positions when they are not supposed to. Sell-offs reduce the price of good companies and pave the way for investor seeking to reap gains in the next three to five years. If you are considering investing in Canada, focus only on non-resource related stocks such as AutoCanada, Canadian Western Bank, Home Capital, and Stantec.


Amidst the commodity-related turmoil, Canada’s economy is bound to experience some growth in the future, thanks to a firmer US dollar. Many analysts and traders believe the Canadian stock market corrected itself in the third quarter, which is correlated with the escalating US economy.


In August, the country reported better than projected gross domestic product. This month, the World Economic Forum’s Global Competitiveness Survey recognized Canadian banks are the safest worldwide, which recorded only two small regional bank failures in nearly 100 years, as well as zero failures during the Great Depression in the 1930s. The nation is slated to bottom out through October and rally in November and December.


Its recent underperformance is attributed to the country’s degenerating economy and woes over the impact of oil prices to its housing market. It is awaited to end in 2015. Short interest in stocks has been climbing steadily this year and have reached its highest since the summer of last year.


Economic indicators are surpassing estimates consistently in the second half of the year. Much of the trepidation over the energy industry has dwindled, with majority of analysts predicting oil prices as low for longer, which can benefit energy firms in the event oil prices inch higher.


When you see traders going back to the market, start looking at the Canadian financial sector, the first sector that is believed to rebound. The quality stocks and stocks in the defense trade are anticipated to lead to a surge of the TSX before the year ends. Also, consider real estate investment trusts, which could help lead to a TSX rally. Valuations have steadily plummeted this year and are hitting below historical averages.


Canadian stocks, yay or nay? Proceed with caution. Investors, be wary of the S&P 500 as it will continue to outperform the S&P/TSX Composite Index in the long run. Do not be overly bullish on the Canadian stocks.