At this point, it’s pretty clear what works best for the Canadian stock market.
In the first few months of the year, optimism over vaccines reignited investor interest in economically sensitive stocks and value names, which the Toronto Stock Exchange has in abundance.
That backdrop saw the S&P/TSX Composite Index post a first-quarter gain of 7.3 per cent, easily outclassing the S&P 500 index, which rose by 5.8 per cent, as well as the MSCI All-Country World Index, at 4.2 per cent.
The hot streak ended in April, as the reopening trade went dormant. Rising COVID-19 case counts globally, including an alarming outbreak in India, sapped some of the enthusiasm for a globally synchronized economic awakening coming out of the pandemic.
Once again, the TSX fell behind U.S. and global stock benchmarks, as it has for most of the past decade-plus.
But for Canadian stocks, the best may be yet to come. Vaccines will ultimately overwhelm the virus, the economy will be unleashed, and the global appetite for Canadian stocks should gain strength, said Garey Aitken, chief investment officer at Franklin Bissett Investment Management.
“If we see more robust synchronized global growth coming out of this, that’s a really good setup for Canada,” Mr. Aitken said. “I’m not this bullish that often, but I think Canada could really have its day in the sun.”
Not since the 2000s has that been the case. Back then, China’s rise to economic superpower kept Canadian resources in constant demand, setting up a decade of superior equity returns. The S&P/TSX Composite Index beat the S&P 500 in eight of 10 years between 2000 and 2009.
The script flipped after the global financial crisis. As an era of muted growth took hold, the commodity supercycle came to an end, and the global attraction to the Canadian market faded.
But commodity markets are heating up once again as a monumental economic expansion takes shape.
In February, the Canadian economy grew by 0.4 per cent, even in the midst of various states of lockdown and regional outbreaks, according to numbers released by Statistics Canada on Friday.
“The numbers were good,” Mr. Aitken said. “I can’t imagine how good they might be come Canada Day.”
The corporate sector was also resilient through the pandemic’s second wave. In the United States, first-quarter earnings results have been remarkably strong, with nearly nine out of 10 companies beating estimates. Projected profit growth for the U.S. corporate sector has nearly doubled in just a few weeks. And that was through winter months, when many businesses were still closed because of COVID-19.
The kind of growth that will be generated from a full reopening of the economy will require plenty of sustenance in the form of resources, which Canada is poised to supply.
The early makings of a commodity bull market seem to have rekindled international interest in Canadian stocks. After net foreign buying turned sharply negative in 2020, foreign money has begun flowing back into TSX listings in recent months. In February, foreign investors made more than $7-billion in net purchases of Canadian equities, the highest monthly total in more than four years.
Returning investors are finding a market teeming with stocks at bargain-basement prices.
The long period of apathy toward the Canadian stock market, combined with immense global demand for U.S. stocks through most of the pandemic, has opened up a huge valuation gap.
The S&P/TSX Composite Index currently trades at about 17 times forward earnings estimates, compared with a multiple of about 22 for the S&P 500. There hasn’t been a discrepancy between U.S. and Canadian stocks that wide since the peak of the dot-com frenzy, more than 20 years ago.
The bursting of that bubble, incidentally, ushered in an eight-year outperformance cycle for Canadian stocks, Martin Roberge, a portfolio strategist at Canaccord Genuity, said in a note. “One key factor contributing to this outperformance was foreign investors being net buyers of Canadian stocks,” Mr. Roberge said. “This is where we are today.”
The low prices for Canadian stocks extend well beyond the commodity sectors. Throughout the Canadian market, many companies trade well below their U.S. counterparts, despite similar business prospects, said Colin Stewart, chief executive of JC Clark Ltd.
Consider the aerospace sector, which is seeing enormous investor interest in the U.S., while a Canadian stock such as Héroux-Devtek Inc. has yet to regain its prepandemic high, Mr. Stewart said. “Some of these stocks are in the penalty box just because they’re in Canada.”
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Tim Shufelt