December 2, 2011 | In: Opinion

Canadian Stock Market Outlook 2012

The Canadian stock market is, according to Wikipedia, the 8th largest in the world by market capitalization (around $2 trillion), which is saying something. In this post, I will try to examine what will happen to the major Canadian stocks in 2012.

Gold stocks: Gold, believe it or not, has reached a peak in 2011, and may reach a small peak in 2012 before retreating. The USD is getting stronger, and people are realizing that Gold is worth nothing without the USD, and that the USD is here to stay and will survive, and will come out from this mess stronger than ever. Gold stocks will be affected by this, they will experience a small bump beginning of 2012, only to retreat for the rest of the year. The retreat may be substantial.

Oil stocks: Oil has tried very hard to reach a record this year, but it couldn’t. It failed to sustain the $100 level for a decent time. This means that large investors and lobbies did all they can to bump oil beyond its normal price, but they couldn’t, which in its turn means that they will try the same game in 2012 (but with less effort). This means that oil, similarly to gold, will go up slightly beginning of the year and then will retreat greatly. Oil has no reason to go up nowadays: Libyan oil is now flowing, economies cannot recover with high oil prices, and the effects of what’s happening in the Middle East are not as the oil lobbyists hoped for. I would stay out of the oil game until at least March.

Mining stocks: The main world importer of metals in the world is China, and China has already signaled that its economy is slowing. I think that the Chinese economy will slow down even further, this is because China isn’t as cheap as before (labor costs have increased there), which makes it less attractive for companies wishing to produce their products there.

Bank stocks: Bank stocks, in my opinion, are currently the worst stocks to hold. They are very dangerous, it’s better to completely avoid them in 2012. Here’s why:

- The debt ratio per capita in Canada is 150%, meaning that each Canadian resident carries a debt of 150% of his salary. Not that good! This means that a slight disturbance in the Canadian economy will wreak havoc upon the lenders (the banks) who will then start experiencing the sour taste of foreclosures. US banks are currently tasting it, and they said it’s not only sour, it tastes really, really, bad. Look at both BAC and C if you don’t believe me.

- Although Canadian banks have little exposure to anywhere but the US, they will still be affected by what’s happening in Europe. Let’s take a look at the Royal Bank chart for this year:

Figure 1: Royal Bank – Year to Date (courtesy of Google Finance)

And if you think RY is an isolated case, let’s check BMO:

Figure 2: BMO – Year to Date (courtesy of Google Finance)

And if you still have any doubts, let’s check TD:

Figure 3: TD – Year to Date (courtesy of Google Finance)

You can easily see from the above charts that RY, BMO, and TD (as well as all other Canadian banks) have been affected greatly by what’s happening in Europe, even though the exposure of Canadian banks to Europe is minimal. Now what’s happening in Europe is really the tip of the iceberg, the worst is yet to come, we are only talking about Greece, and we are hoping that the rest of Europe doesn’t follow suit, but we know that the fall of the whole of Europe is imminent, and we can’t hide behind our finger forever. I still believe though that bank stocks are undervalued and that Canadian banks are always a buy when they go down (of course, for the long term).

Technology stocks: The most important technology stocks (for the moment) in Canada are IMAX and RIM. In short IMAX is overvalued with a P/E ratio of 20 for a technology that may be obsolete in a few years (that is, if IMAX doesn’t create a better technology), while RIM is going bankrupt. In short, both stocks must be avoided.

Services and consumer cyclical stocks: Since there will be a slowdown in the economy in general, then services and consumer cyclical stocks will go down next year. For an example on how bad service stocks can be next year, check MFC’s performance for 2011.

Figure 4: MFC – Year to Date (courtesy of Google Finance)

As you can see, I think that 2012, with the exception of the first 3 – 4 months, will be very gloomy for the Canadian stock market. Unless the US recovers in 2012, which will not happen, the Canadian stock market outlook for 2012 is bad, really, really bad! Of course, some stocks will go up, and it is these stocks that you should buy because a stock that goes up in bad times, will pop in good times.

Diversify your portfolio, buy low – sell high, don’t trade with risk money, have patience, don’t be afraid and don’t be greedy, and you should be OK!

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