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TSX performance could lag U.S. stocks for another decade: Scotiabank Add to ...

Here’s some bad news if you are growing impatient with Canada’s underperformance relative to the S&P 500: We could be within a 12-year “secular” leadership cycle, meaning that the underperformance could have another decade to go, according to Bank of Nova Scotia strategist Vincent Delisle.

His numbers suggest that the S&P/TSX composite index has been dragging its feet for 26 months. In 2013 alone, the Canadian benchmark index has slipped more than 3 per cent in U.S. dollar terms, while the S&P 500 has rallied some 14 per cent. Over the past 26 months, the performance difference (again, in U.S. dollar terms) has been a whopping 41 per cent – marking a massive shift from the years 2001 through 2011, when the TSX was top dog and outperformed the S&P 500 by 247 per cent.

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According to Mr. Delisle, there have been four leadership cycles since 1950, averaging 12 years each. “In our view, ongoing TSX underperformance could be the start of a fifth secular cycle,” he said in a note.

But wait, there could be an opportunity for nimble investors here. That’s because there are brief periods of leadership reversals within these long-term secular trends. What would trigger a reversal that would give the lagging TSX a boost over the S&P 500? Mr. Delisle believes there are five factors:

1. A deeper discount valuation for Canadian stocks.

2. A lower Canadian dollar.

3. A stabilized or recovering Canadian housing market.

4. A improvement in Canadian corporate earnings that overshadows U.S. earnings.

5. Accommodative monetary policies in China and emerging markets.

Mr. Delisle argues that factors 1 through 3 should appear later this year. Factor 4 could be elusive and factor 5 “remains a challenge.”

Follow on Twitter: @dberman_ROB

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