The anticipation of a slowdown in aggressive interest rate hikes, alongside a possible plateau in inflation, has some experts calling for an equity rebound in the TSX Composite Index by the second half of next year.

“One of the most remarkable developments during 2022 was Canada’s outperformance versus the U.S. and other developed markets. We think this outperformance is poised to continue next year,” Kurt Reiman, a senior strategist for North America at BlackRock, said in a phone interview on Dec. 14. 

Reiman thinks the strength in the market will be driven by the financials and energy interiors as they stand to benefit the most from the coming macroeconomic environment.

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He explained that the energy sector will continue to generate strong, free cash flow, exercise discipline on new investments, and is an industry that tends to do well in an elevated inflation environment. Financials have also been known to do well in higher interest rate environments, he said.

The Bank of Canada hiked interest rates by half a percentage point for the last time this year on Dec. 7. This marked the seventh interest rate hike in 2022.

“While we don’t think the BoC is likely to increase interest rates next year, we also don’t see a scenario where they cut rates either,” Reiman noted.

Another market expert shares Reiman’s optimistic forecast for Canadian stocks in the new year. 
“We think the TSX will enter a bull market in 2023,” Brian Madden, the chief investment officer at First Avenue Investment Counsel, said in a phone interview on Wednesday Dec 14. 

Madden is also calling for an upswing in the industrial and financial sectors – where certain stocks have been laggards in 2022. He thinks stocks within these industries are best positioned to rebound from a possible coming recession and are priced fairly cheap.

As for timing, Madden said the most market gains will be made in the second half of the year.  
He explained the first half of 2023 will be all about playing defence, while the second half will be about taking on an offensive strategy by taking on more risk and getting more aggressive with portfolio positioning. 

“There will be good bargains to be had in some of those sectors sometime around the middle of the year,” he added.

While these market experts are optimistic for 2023, headwinds still remain ahead of the Canadian equity market, a report by Mackenzie Investments released on Dec. 15 detailed.

“The new year will bring more volatility (to the market) due to tighter monetary policy, geopolitical risks, and slower economic growth,” the report stated.

“If central banks are forced to maintain policy rates at these levels to rein in inflation, tighter financial conditions will be a headwind for households and business fundamentals in 2023,” Steven Locke, the chief investment officer of fixed income and multi-asset at Mackenzie Investments, said.

“The impact on markets has already been substantial, but we believe investors may be underestimating how high policy rates may rise,” he added. 

Despite the report’s caution, Mackenzie’s experts are ultimately calling for a stronger market performance ahead. 

“We are hopeful the worst is behind us in the bond market and that there will be a broad-based recovery in equities towards the end of the year,” Locke said.