A woman holds U.S. and Canadian flags in Ottawa.CHRISTINNE MUSCHI/Reuters
The rally of mining and energy stocks from the commodity crash may be giving the false impression that Canadian stocks are expensive.
In fact, once resource sectors are factored out, Canadian valuations are trading at a substantial discount to U.S. stocks, National Bank of Canada said in a note.
"That suggests the TSX has room to run," economists Krishen Rangasamy and Matthieu Arseneau wrote.
The S&P/TSX composite index is among the top performers in the developed world, with a year-to-date increase of 6.4 per cent.
Foreign investors have begun to increase the amount of money they dedicate to Canadian assets, according to recent international securities transactions figures.
"Investors may be realizing that there's more to Canada than oil and that the economy is far from imploding," the economists wrote. "The stabilization of oil prices has helped, but so has the federal government's plan to support economic growth through significant stimulus."
As the global commodity complex has stabilized, Canadian resource stocks have outperformed all others. Within companies in the composite, materials stocks have risen 31 per cent year to date, while energy stocks have increased by 14 per cent. Amid earnings pressure, price-to-earnings ratios in those sectors have inflated considerably.
"If one excludes the depressed resources sector, the difference between U.S. forward P/Es and Canadian ones is high by historic standards," the economists wrote. Excluding resources, the composite's P/E is more than three points lower than that of the S&P 500 index. Outside of the last six months, Canadian non-resource stocks haven't been that relatively cheap since 2003.
Tim Shufelt