By Fergal Smith
TORONTO (Reuters) - Soaring earnings growth prospects for Canada's main stock index have raised portfolio managers' confidence that the commodity-linked market's move to a record high is justified and could boost the attraction for global investors who rushed in this year.
Analysts estimate that earnings for the TSX Composite, which notched a record high on Monday, will grow 45.2% in 2021, Refinitiv I/B/E/S data shows. That is the fastest pace in data going back to 2017 and runs ahead of the 36.9% rate for the S&P 500.
The level of growth reflects a rebound after earnings slumped 18.1% last year as well as a particularly favorable environment for Toronto-listed stocks, with many companies highly geared to economic activity. Growth was 3.3% in 2019, before the COVID-19 pandemic.
Among the sectors with the highest estimated growth this year are energy and industrials, at a 106.3% and 96.8% pace respectively. Shares of resource, industrial and other cyclical companies account for about 70% of the Toronto market, versus 40% of the S&P 500.
Earnings estimates feed into measures used by investors to assess value, such as the ratio of price to earnings. Strong growth tends to support a higher valuation.
"It's all about earnings," said Barry Schwartz, a portfolio manager at Baskin Financial Services. "If the earnings rise in concert with the stock price then you have a phenomenon where 'Holy smokes my stocks have gone up,' yet on a valuation basis they are no more expensive."
At 13.8, the price-earnings multiple for the TSX has barely changed since the start of the year, according to the data. Meanwhile, the index has gained 16%, outpacing major U.S. indices.
The S&P 500's multiple is higher, at 22.2, reflecting a much heavier weighting in technology shares. But strategists at BofA Securities said last week that the discount for the Toronto market is overdone, especially because it is better-positioned to benefit from global economic recovery.
"If you believe that we're on a multi-year tailwind for earnings growth, then you want to own those companies that are going to benefit," Schwartz said.
Foreign investors appear to have caught on, with data from Statistics Canada showing that portfolio inflows into Canadian equities have jumped to C$28.6 billion ($23.2 billion) in the first four months of the year, the biggest inflow for the period since 2017. It follows outflows for the full year in 2019 and 2020.
"Global investors see the TSX as a way to benefit from the upturn in the global economy," said Angelo Kourkafas, investment strategist at Edward Jones in St. Louis.
The IMF expects the global economy to expand 6% this year after contracting 3.3% in 2020. The improved outlook has bolstered commodity prices, including oil.
There are risks to the outlook, such as faster-than-expected interest rate hikes from central banks. But analysts expect earnings growth to extend into 2022, at a rate of 10.8% for the Composite index.
Last month, portfolio managers in a Reuters poll forecast the TSX would rise to 21,750 by the end of next year, about 8% above current levels.
"The market is pricing in earnings growth and that earnings growth will drive the majority of the index going forward," said Kevin Headland, senior investment strategist at Manulife Investment Management.
($1 = 1.2321 Canadian dollars)
(Reporting by Fergal Smith,; Editing by Denny Thomas and Dan Grebler)