David Rosenberg is chief economist with Gluskin Sheff + Associates Inc. and author of the daily economic newsletter Breakfast with Dave.
Well, there can be no doubt that Canada faces some huge obstacles — from excessive debt to lingering trade issues to defusing the housing mania to surplus oil to populist government policies (only one Conservative government in the land) to an uncompetitive tax regime. No shortage of constraints, I can tell you, underscored by a rapid slowing in equity market inflows from abroad and outright net outflows of foreign direct investment.
These challenges, however, seem to “be in the price,” as they say in the markets. This is one reason why the Canadian dollar seems to have found a bottom and one reason why investors cling to the view that the Bank of Canada has the flexibility to follow, as opposed to lag, the Fed. The discount that the Canadian stock market trades at is epic and must be mouth-watering for any global value fund manager.
The forward P/E multiple on the TSX is 14.7x versus 16.5x for the S&P 500 and one of the most attractively priced stock markets in the industrialized world. The near 7-per-cent earnings yield compares with a 2¼-per-cent 10-year GoC yield for one of the most compelling equity risk premiums on the planet. On a cyclically adjusted ‘Shiller’ basis, the so-called CAPE in Canada is 19.1x compared with 26.7x in the USA – a record differential (normally they are right on top of each other at 21x-22x). For the S&P 500, only 3 per cent of the time in the past has the market been so expensive on this basis; for Canada, the comparable is closer to 60 per cent. In other words, Canadian equities trade today in the lower half of the historical range.
In terms of sectors, energy, real estate, financials and consumer stocks all trade at below-normal multiples in Canada. Materials are fair-value. Industrials, tech, health care, utilities and telecom command premia and look a tad expensive relative to that first group. In the U.S., there are only two sectors with P/E multiples below historic norms and they are in telecom and health care (the exact opposite of Canada).