Happy New Year!
We hope everyone had a safe and relaxing holiday season. Wishing you all the best in 2021!
Report Updates
We have report updates on K-Bro Linen (KBL) and Leon's (LNF). Both ratings were maintained but the prospects of one company, in our view, look far better than the other. Log in and read the reports to see our thoughts on these companies.
Read the latest updates by logging in here!
Market Update
Despite the increase in COVID cases, tighter lockdowns, and a new virus strain, markets continue to see strength under the pretext of an economic recovery and continued vaccine rollouts. This also reflects the continued risk appetite for stocks, particularly those that can continue to be well-positioned as lockdowns continue (eg. stores that are e-commerce enabled) or are likely to see more of an immediate rebound if lockdowns ease sooner than later (oil production, travel, hospitality etc).
Overall, estimates for corporate earnings growth in the next twelve-months look optimistic, particularly in Canada:
Granted, Canada does face a struggling energy sector which continues to pose a risk for TSX returns. However, the share of the energy sector on the index has decreased over the last few years and the TSX is becoming increasingly diversified on a sector basis. To put things in perspective, the weighting of the technology sector is nearly the same as energy today (10.3% and 11.7% respectively). This was almost unimaginable a few years ago.
On the other hand, exposure to energy may actually benefit the TSX this year if economic activity rebounds. The materials sector also poses a commodity risk, but we would argue exposure to metals, mining and production is not such a bad play when there are expectations of economic recovery. This in turn could also benefit the industrial sector. Overall, we think the TSX is positioned well if there is indeed a global economic rebound in the next 12 months.
How expensive is Canada relative to other countries?
The chart below shows forward price-to-earnings ratios for major developed economies including Canada. 
While in recent years it is no surprise that Canada (red line) has a lower P/E ratio than the US (blue line), it is also slightly below Europe (yellow) and Japan (green). What is interesting to note here is that the TSX has historically traded well above other developed countries ex-US. If we think in terms of reversion to the mean and add in the higher expected earnings growth, the TSX as a whole seems attractive from a valuation standpoint relative to other geographies and this could mean a good year for the TSX in an economic recovery scenario.
New Year, New Forecasts
Over the last month or so, there has been the usual barrage of economic and market forecasts. Some might be right, most will be wrong, but diversification should always be an important part of one's portfolio. Having a bit of exposure in different asset classes, sectors and geographies mean an investor does not need to time which market outperforms and when. Diversified portfolios allow an investor to see some benefit no matter which market or asset class outperforms. In turn, the New Year and RRSP season can always be a good time for an investor to dust off their portfolio and sharpen their pencils to ensure everything is set up how it should be and that nothing has moved out of line over the last few months/year.
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