https://www.bnnbloomberg.ca/polopoly_fs/1.1102442!/fileimage/httpImage/image.png_gen/derivatives/default/wti-vs-canadian-energy.png
Ryan Bushell's OPINION
MARKET OUTLOOK
The TSX had a strong Q2 as oil prices went on a volatile ride, but ultimately finished the quarter at levels not seen since 2014. Supplies continue to tighten more than expected and the world is running out of spare capacity. Unfortunately, despite strength more recently Canadian energy stocks continue to badly lag the price of the commodity even though differentials have normalized and the Canadian dollar has weakened significantly. This chart depicts oil prices (WTI) in Canadian dollars relative to Canadian oil producers represented by the iShares Canadian Capped Energy ETF (XEG) (source: Thomson Reuters)
Looking at the chart, you can see how much room there’s for Canadian energy stocks to perform, especially in light of the C$98 WTI environment we are in currently. I think the back half of this year will be strong for energy stocks, as demand is traditionally significantly stronger in the second half of the year and geopolitics in Iran, Venezuela and Libya are not likely to improve. Financials, the other heavyweight in the TSX, are down year-to-date despite a favourable interest rate environment and rising earnings. Fears about Canadian housing and the consumer abound, but employment remains strong. Wealth management is booming and net interest margins are expanding. Long-term yields have remained fairly well contained, which has hurt the life insurers. But with inflation likely to pick up and employment remaining strong, you could see 10-year U.S treasuries trade through a 3.5 per cent yield in the second half of the year, which should improve sentiment. Add the positives for these two sectors together, combine it with some positive pipeline news and you get a pretty strong case for the TSX to move materially higher in the second half following a sluggish start to the year. This is very similar to what we saw in 2016, when the TSX returned over 20 per cent including dividends.