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For Avery Shenfeld, chief economist at CIBC World Markets, down is starting to look up: He expects Canadian stocks will outperform this year, and largely because of what’s going on beyond our borders.JENNIFER ROBERTS/The Globe and Mail

Canada has dropped off the radar screens of many investors in recent years. Its benchmark index is no higher today than it was in 2011, the currency is slumping and the economy is idling.

But for Avery Shenfeld, chief economist at CIBC World Markets, down is starting to look up: He expects Canadian stocks will outperform this year, and largely because of what's going on beyond our borders.

"Canadian equities have more elbow room, with current valuations not as stretched as those stateside, and earnings having more leverage to the global economy," he said.

Indeed, the global picture is key here. According to Mr. Shenfeld, the S&P/TSX Composite Index does better than the S&P 500 when the global economy is expanding at a pace of 4 per cent or more: It gains an average of more than 14 per cent when the global economy is humming, versus gains of less than 6 per cent when the economy is sluggish.

Strong growth hasn't been occurring much in recent years, with the United States, Europe and Japan struggling. Last year, the global economy grew an estimated 2.9 per cent, according to the International Monetary Fund; the year before that, growth was 3.2 per cent.

In fact, other than 2010, you have to go back to the years before the financial crisis to see consistent growth above 4 per cent.

Sure enough, Canadian stocks did well back then, outperforming the S&P 500 from 2004 through 2007, including an 18 percentage-point trouncing in 2005.

Last week, the IMF said it would raise its global growth forecast for 2014 from the current forecast of 3.6 per cent, and Mr. Shenfeld believes global growth will surpass most expectations with a pace of 4 per cent.

While that might sound like an argument in favour of global diversification, Mr. Shenfeld argues that the best opportunities are closer to home because Canada's benchmark index has a hefty exposure to the sort of resources that feed global economic activity.

"Sluggish activity has held back demand, in a period in which supply was expanding in such areas as natural gas, oil and base metals," he said. "Little wonder, then, that the resource sector has been largely responsible for a disappointing earnings recovery of late, offsetting steady gains elsewhere in the index."

Last year, materials stocks fell 31 per cent and energy stocks rose just 10 per cent, lagging far better gains among consumer discretionary stocks, tech stocks, industrials and financials. Overall, the S&P/TSX Composite rose less than 10 per cent, lagging the S&P 500 by an amazing 20 percentage points – or the widest spread between the two indexes in 15 years.

Mr. Shenfeld believes that supply increases are already priced into resources such as natural gas, metals and oil (Neil Young: Please invite Mr. Shenfeld to one of your anti-oil sands gigs to discuss). What isn't priced in: Rising pressure from demand associated with global economic activity.

He estimates that Canadian corporate earnings will rise 13 per cent in 2014, up from the low single-digits last year and well above expected earnings for the S&P 500. Yet Canadian stocks are cheaper than U.S. stocks – by about 8 per cent, according to his calculations.

"After being trounced by New York (and Europe and Japan for that matter) in 2013," Mr. Shenfeld said, "Toronto stocks entered the year with less stretched valuations, and greater potential for earnings gains that will pay off in outperformance in the year ahead."

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