TSX Composite Still Looks Attractive

Monday, June 12th, 2006
By Inya Ivkovic, MA for Profit Confidential

After all the market doom and gloom of the past couple of weeks, I decided it is time to dust off my trusty, old crystal ball and try to read the signs. OK, I’m just kidding. Of course I don’t have a crystal ball, and, as for my tea leaves, I use them for making tea, nothing else. But, there are other signals I could try to use to come up with a reasonable, near-term outlook for my favorite S&P/TSX Composite.

After the recent correction, I believe the S&P/TSX will rebound and end the year on the positive note, somewhere between 12,800 to 13,000 points. And, if the U.S. economy manages to grow, however modestly, we could see the index climb up to historic 13,500.

As already discussed many times, adding the most fuel to S&P/TSX Composite’s explosive performance were the just as explosive economies of China and India. For example, China’s gross domestic product grew nine percent year-over-year. However, the country’s belated industrialization (in comparison to the developed world) has left millions of rural workers without jobs. And although Chinese population currently stands at 1.31 billion, 130 million of them are currently unemployed, which makes them an unhappy force to be reckoned with.

The same is happening in India as well. As a result, both countries have to keep on growing at the same pace if they wish to avoid the proverbial “smelly stuff” hitting the fan. Judging by the demand for just about anything from both China and India, I believe both countries will be able to sustain similar, rapid growth rate for at least the next six months, if not to mid-2007.

I’m aware that the recent market correction, including S&P/TSX Composite, spooked many investors. Partly responsible is the old adage that what goes up must come down, and partly responsible is the good, old profit-taking. Plus, many investors, including institutions, believed that the index’s price/earnings multiples were too high. However, what most disregarded at the time was that if anyone bothered to include interest rates in the equation, the TSX index would be actually quite undervalued.

The way I see it, there is still substantial momentum to enjoy on Canada’s stock markets. Also, while I am still very fond of Toronto’s commodity stocks, for those with more risk tolerance, I suggest checking out stock options as well, preferably on precious metals and energy stocks.

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Tags: china, stock market, U.S. economy