Outlook for the TSX in 2009 and Beyond

by Travis Steward | May 27, 2009

Many have been taken by complete surprise given the dramatic recovery seen in the TSX exchange so far in 2009. We were not surprised, however. As discussed in our last two market updates, the prospects for the TSX exchanges are perhaps some of the best in the world. We would now like to present our short and long-term outlook for the TSX and Canadian investing to get a clear picture of where we are going, what to expect, and how to position accordingly.

Asia and Resources

The not-so big secret these days is the manner and degree in which Asia is quickly bucking the recession trend plaguing all developed nations. We presented our thoughts on this in our March newsletter, outlining how Asia has been supplying the United States’ consumption boom with little to no compensation. It is our belief, that Asia benefits from the decline of America, which is in stark disagreement to many pundits and commentators who believe that U.S. consumption is the driver of the world. To explain this in a simple manner: it is the debt behind U.S. consumption that has been the driver of the previous paradigm, as it lead many producers of actual wealth (material items) to send their products erroneously to America in trade for false wealth (U.S. dollars created from debt) instead of using and consuming these products themselves.

However, since then we have continued to see dramatic outperformance in Asia, leading to the bottoming of global commodities. Canada has a unique position in the world as being one of the highly develop economies that deals in very basic resources. This gives great stability in terms of the risks facing resource producers, which are typically quite high given many resource companies have to do business in less than savoury jurisdictions.

Asia will continue its March forward, taking the quite necessary path of reducing its exports and instead increasing its internal economic activity. As the middle class develops in Asia, we will see increased demand for resources. This will lead commodities higher and higher over the next years and decades, which will allow Canadian producers of any resource to greatly benefit over that time. With that said, this will have a trickle-down influence on all sectors of Canadian businesses, which will lead to general conditions of prosperity even amidst the decline of our largest trading partner.

The Bank of Canada and Interest Rates

Another item that has caught our attention is the strange situation of interest rates in Canada. In America, they feel they require zero percent interest rates because their financial system is in tatters. In Canada, however, our financial system is not in tatters – so why the ultra-low interest rates?

The most likely answer is that the Canadian authorities do not want to have our bonds yielding far higher than our U.S. counterparts. When yields are much more favourable in Canada than the U.S., it leads to an increase in investment in Canada, which consequently results in an appreciating loonie. It is then theorized that this will have very detrimental consequences on our exports, leading to Canada becoming uncompetitive. By lowering our rates, we prevent this from happening. However, this has some very severe consequences. Whereas the zero percent rates in America are like using a defibrillator on a dead body, in Canada, it’s like giving a relatively healthy person a shot of steroids.

Ultimately, the net effect of this weak-loonie strategy is a massive increase in credit. It is for these reasons we believe Canada is on the verge of a stock market bubble. Much of this newly created credit at ultra-low interest rates will find its way into the market. Direct loans for investment will increase, consumption will increase, spending will increase, wages will increase, and so on and so forth, all leading eventually to the stock market and driving it higher.

It is these two themes – the underlying positive fundamentals of Canadian resources due to the growth of the Asian economies, and now the ultra-low interest rates – that lead us to be very positive about the outlook of the TSX going forward. It is already showing signs of this scenario exerting itself, with its great outperformance of the U.S. indices in 2009.

Long-Term Technical Picture

TSX

This is a 20 year chart of the TSX in monthly periods. As you can see we have held the long-term trend-line as discussed in the March newsletter. Going forward, it’s not unreasonable to have a very severe pullback, as the degree and magnitude of the recent rally is greater than any before it. Never minding that small bump in the road, we feel the market has a decidedly bullish posture given the reasons explained above, and feel it is imperative to be invested in the TSX to participate in short-term and long-term gains.

Contact Information

Travis Steward | Vancouver, BC | Email