David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
Canadian equities are beginning to trade like an emerging market. As challenging as things are from a variety of standpoints, we definitely are not Indonesia, Malaysia or the Philippines. No doubt, a move towards a more competitive tax climate and a pro-growth energy policy, coupled with efforts to reduce excessive regulation, would help a lot. Perhaps a political inflection point will be reached 11 months from now when Canadians go to the polls in the next federal election. After all, Ontario and Quebec, and likely Alberta next, have all moved back towards more pro-business political regimes.
The Canadian stock market trades at barely more than a 13x forward price-to-earnings multiple right now, which has only been this low 5 per cent of the time in the past. So yes, the news may be bad, but the Canadian equity market seems to be priced for something worse than just ‘bad’. Relative to the United States, the near-3 percentage point P/E multiple discount has not been this wide since the Summer of 2004 (when the TSX went on to surprise everybody by outperforming the S&P 500 in the ensuing year by more than 1000 basis points).
Now to the matter at hand from an asset mix standpoint, which is how the Canadian equity market valuation looks relative to residential real estate. The charts below say it all — the ratio of Canadian home prices to Canadian equity prices has only been as high as it is today one other time in the past. This ratio, in fact, is 35 per cent above the historical norm. So if you believe in mean-reversion, cashing in some of your chips on your long real estate position to put into highly inexpensive Canadian equities may not be a bad thing to do. Merely label this as appropriate “rebalancing." We also below include the flipped chart of equities to real estate to again highlight just how attractively priced the local stock market is right now — relative to earnings, relative to where U.S. equity markets are trading, and relative to the other competing asset class otherwise known as residential real estate.