While Canadian stocks appear cheap on a historical basis, stocks are cheap everywhere as uncertainty dogs markets, notes UBS Securities Canada Inc. in a new report.
UBS has a 12-month target for the TSX composite index of 14,000, which it notes would be a hefty 15% gain from current levels. Yet, at the same time, UBS says such a gain would only close about half the gap to normal valuations.
“If our 2012 bottom-up earnings outlook comes to pass, our 14,000 target implies a trailing multiple of 13.9x; even if there is no earnings growth, it would be 15.3x which compares to the average trailing P/E of 17.1x over the last 10 years and 19.4x over the last 25 years,” it says.
It’s forecasting a 10% rise in earnings for 2012, led by the materials, healthcare, and industrials sectors. Energy and tech sector earnings are expected to contract in the year ahead.
But the issue weighing on stocks is market uncertainty. “Economic uncertainty has led both trailing and forward P/Es to decline to levels not seen in at least 15 years,” it notes.
Indeed, while the TSX’s valuation is below its historical norm, UBS says other global markets are even cheaper, “which places the TSX at a relative premium”.
On a sector basis, notwithstanding the expected earnings slump, UBS says that the energy group looks appealing as: the stocks have outperformed the commodity by about 3% per year; and, they now look attractively priced relative to that trend.
“While financials are at the epicentre of global macro concerns, Canadian banks should be more insulated, so they also look attractive given the substantial valuation discount currently prevailing,” it says. Among the banks, Bank of Nova Scotia is UBS’ top pick.
The firm also recommends that gold should have a place in investor portfolios. “Gold continues to play its role as a hedge against sovereign debt concerns, and given the unpredictable swings in the macro environment, we believe it should be included in portfolios despite its strong run,” it says.