The Supercycle’s Shadow

A commodity boom “was over by 2011 and Canada has sucked wind ever since,” says a Toronto global strategist. by the effect of China’s unprecedented infrastructure program.”

Terry Dimock, head portfolio manager at National Bank Investments in Montreal, agrees that Canada’s outperformance during the past 15 years stemmed primarily from the Chinese commodity juggernaut, which was sufficient to more than offset the subsequently dwindling performance of Canadian markets during the last five or so years. As evidence he points to the graphic contrast between Canadian and U.S. indexes during the two periods.

“If you look at the S&P/ TSX Composite Index, it had an annual compound return (including dividends) of 8.9 per cent between 2001 and 2010 while the S&P500 had an annual compound return of 3.0 per cent, or -2.3 per cent in Canadian dollars given our currency’s appreciation during that period,” says Dimock. “From 2011 to 2016, the TSX had an annual compound return of 5.2 per cent (including dividends) while the S&P500 had an annual compound return of 12.4 per cent, or 17.3 per cent in Canadian dollars. So the Canadian market performed really well from 2000 to 2010 due, in part, to the expansion in commodity demand from China, but the U.S. market has outperformed Canada’s post the financial crisis.”

Adds Oscar Belaiche, Toronto-based senior vicepresident and portfolio manager at 1832 Asset Management L.P., which oversees the Dynamic Fund family on behalf of Scotiabank: “During the period from 2000 to 2010 the U.S. had a lot of issues while Canada skated through, the big reason being resource outperformance. Canada also avoided the steepness of the recession that began in 2008, largely because our banking system was solid. The U.S. was hit hard, but if you look at the period from 2010 to 2016, the U.S. has done much better than Canada.”

Brodeur agrees that Canada might have done much worse following the 2008 recession, were it not for our banks. “Our banking system did not collapse, and we didn’t have the same implosion in our index as in the rest of the world,” he says. “Our banks are now back to new highs while in the U.S., for example, Citigroup Inc. was US$557 before the recession and it’s now $57, or ten cents on the dollar. Our banking industry served Canada well.”

As for small- and midcap equities, which outperformed their broader market counterparts globally as well as in Canada, Belaiche says this is to be expected given these investments’ size and their risk/reward profile.

“It’s the denominator effect,” he says. “When you’re smaller to start with, it’s easier to grow bigger. There’s more risk in small caps, but that means more potential for higher returns. The small-cap market is more inefficient, too, and that creates opportunities for active managers. But you need good managers to find good investments — they’re the ones making the calls and driving fund performance.”