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Why Canada’s stock market is among the most alluring in the world

If you still want to have some toes in the equity pool, Canada right now offers up some of the most alluring valuations in the world.

Even in today's roller-coaster ride, it is comforting to know that there is tremendous valuation support for our local stock market. A market, by the way, that is no higher today than it was a decade ago, and a market that is unchanged from where it was in the summer of 2014 (only Australia and Singapore have also gained essentially no ground since mid-2014) even though corporate earnings have surged nearly 30 per cent since that time.

The net result: The trailing price-to-earnings (P/E) multiple on the TSX is 17.9 times at the moment, having compressed by nearly six multiple points from the cycle high of 23.6 times. This compares to 21.1 times for the S&P 500 and a historical average of 18.1 times (since 2001).

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The forward P/E multiple on the TSX is 14.5 times, or more than two multiple points below where the S&P 500 is currently, not to mention just below the historical norm of 14.6 times. The multiple on this basis hit a cycle high of 18.2 times and for all the talk of how the U.S. market has recently "cheapened up," the multiple stateside has compressed by half of what the Canadian market has done — and is considerably more expensive at 17x for the time being.

The combination of the flattish TSX and ongoing payouts means that the dividend yield is flirting near 3 per cent. That is a near 50 basis point premium to the 30-year Government of Canada yield and a 65 basis point pickup to the 10-year part of the curve. Compare and contrast to the sub-2-per-cent dividend yield for the S&P 500, which is now at a 120 basis point discount to the long bond and nearly 100 basis points lower than the yield on the 10-year Treasury note.

You look around the world, and there are not too many places where the forward and trailing multiples are trading below their historical norms. In fact of the major markets, only Japan is trading below its 10-year average. Many pundits like to justify buying U.S. stocks because they have a 300 basis point equity risk premium. Well, I have news for you. That ERP in Canada is closer to 500 basis points!


David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.

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