By Fergal Smith
TORONTO (Reuters) - Canada's main stock index is set to edge higher in 2024 and then notch a record high next year as the expected start of interest rate cuts by central banks bolsters the high-dividend paying stocks that make up much of the market, a Reuters poll found.
The median prediction of 23 portfolio managers and strategists in the Feb. 9-21 poll was for the S&P/TSX Composite Index to advance 2.5% to 21,750 by the end of 2024, compared with 21,000 expected in a previous poll in November.
It was then expected to climb to 22,150 by the middle of next year, moving past the record closing high set in March 2022 of 22,087.22.
"There may be a healthy debate about how quickly interest rates come down but the direction is definitely down. Canada is hyper sensitive to interest rates," said Matt Skipp, president of SW8 Asset Management.
The Canadian economy could particularly benefit from lower interest rates after households borrowed heavily during the COVID-19 pandemic. Economists in a separate Reuters poll expected the Bank of Canada to begin cutting rates from a 22-year high of 5.00% in June or later and to reduce borrowing costs by 100 basis points in total by the end of 2024.
"We will probably get a rate cut this year and that should boost large dividend stocks such as banks, telcos, pipelines," said Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc.
Interest rate sensitive stocks such as financials, utilities and real estate account for 36% of the weighting on the Toronto market, while energy, which includes high-dividend paying pipeline companies, contributes an additional 19%.
Since October, the TSX has climbed about 13% as investors raised bets on a soft landing for the U.S. economy. Canada sends about 75% of its exports to the United States.
"The growth and inflation backdrops remain favourable, but of course that won't preclude periods of volatility and corrections, which are common after strong market rallies like the one we had over the past three months," said Angelo Kourkafas, a senior investment strategist at Edward Jones.
Seven of 12 analysts who answered a separate question said a correction is likely or highly likely over the coming three months. Still, a slim majority of respondents expected earnings to increase on a six-month horizon.
"We think the uptrend in equities will continue as the BoC cuts rates in the back half of the year, financial conditions ease, and earnings growth reaccelerates," Kourkafas said.
(Other stories from the Reuters Q1 global stock markets poll package here)