TORONTO, Jan 8 (Reuters) - After two years of extreme swings, Canadian stocks will likely deliver a pedestrian follow-up in 2010, bringing modest gains as the market builds on an improving economy.
Toronto's main stock index, heavily tilted to energy and mining companies, is seen as well-positioned to help satiate the global thirst for resources such as gold and oil.
But a patchy economic recovery and expectations that the world's central banks and governments are preparing to withdraw trillions in stimulus money may make for a choppy year.
'Overall the trend will be higher in the TSX in 2010 but I would say we'll see a lot of volatility because as economies pick up out of recession, it's never a smooth process,' said Kate Warne, strategist at Edward Jones in St. Louis, Missouri.
The composite index has had a solid start to the decade, adding to last year's nearly 31 percent rise, best annual performance since 1979.
That marked a huge rebound from one of its worst years ever in 2008, when the financial crisis and the world economic crash drove it 35 percent lower.
Analysts see modest gains this year. A Reuters poll in December showed a median forecast of analysts and fund managers that the Toronto Stock Exchange's S&P/TSX composite index to end 2010 at 12,500. That's 4.6 percent above Friday's close of 11,953.83.
A similar poll forecast that the U.S. benchmark Standard & Poor's 500 index will rise for a second straight year, reaching a median target of 1,208. The index closed at 1,144.98 on Friday.
Canada could well outperform the U.S. because it has triple the exposure to resources, which best stand to benefit from a global economic rebound, David Rosenberg, chief economist at Gluskin Sheff & Associates, said at an recent investment luncheon.
'I don't remember a time when the downside risks in Canada relative to the U.S. is as low as it is today, or the upside potential ... higher,' said Rosenberg.
The TSX is home to blue-chip gold and energy producers including Barrick Gold and Goldcorp, as well as Suncor Energy and EnCana.
Forecasters generally see further gains in the gold price, which recently hit a record above $1,200 an ounce, and other precious metals, as well as oil above $80 a barrel.
Speculation that more central banks will diversify their foreign exchanges reserves into bullion also bodes well for gold, and by extension, the gold plays on the Toronto index.
Another positive for the Canadian energy sector is the prospect of merger activity, as energy income trusts prepare to convert back into deal-hungry corporations.
PetroBakken and Berens Energy kicked off this year's merger and acquisition news in the oil patch with a C$271 million deal. Analysts say more deals are in the pipeline as debt markets thaw and stock prices rise from depressed levels.
'Even though it was a great time to sit there and pick off your enemies, you just didn't have the financing available,' said Lex Kerkovius, a senior research analyst at McLean & Partners Wealth Management Ltd., in Calgary, Alberta.
'That firepower will come back in 2010, then you'll start to see some activity.'
STIMULUS WITHDRAWAL RISKS, PLAY DEFENSE
But with energy shares up 37.3 percent and material stocks rising 33.4 percent last year, some analysts think the best prospects are in the traditional safe haven sectors.
These include the telecoms sector, home to Rogers Communications, Telus, and BCE, last year's worst performer with a 0.1 percent rise.
'We continue to advocate weightings in groups that have been overlooked in this rally,' said Elvis Picardo, analyst and strategist at Global Securities in Vancouver, British Columbia.
'Those would be things like the so-called defensive sectors, like utilities and telecoms communications, which have extremely good dividend yields but which have really lagged because all the money has gone to the more speculative stuff.'
Another risk with cyclical resource plays is they may fare worst in the event of a negative shock, like the debt problems that emerged from Dubai last year.
The prospect of double-dip recession and sovereign risk issues are just two of the dangers that have elbowed their way into headlines in recent months.
Even if no nasty surprises emerge, market watchers say the expected withdrawal of stimulus packages and ultralow interest rates offered up by governments and central banks at the height of the crisis will be a major challenge for markets.
'The real test is going to be once governments across the world start turning the taps off, which I think you're going to start see in the first half of this year,' said Steve Ibel, institutional equities trader at Beacon Securities in Halifax, Nova Scotia.
($1=$1.03 Canadian)
(Editing by Jeffrey Hodgson) Keywords: COLUMN CANADA MARKETS (kayan.ng@thomsonreuters.com; Reuters Messaging: kayan.ng.reuters.com@reuters.net; 416-941-8109) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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