Seven reasons to buy Canadian stocks
JONATHAN RATNER
Canadian stocks have performed pretty well for investors, generating a total return of more than 17 per cent in the past 12 months, but they’ve lagged the U.S. equity market, particularly since the election in November.
If you’re betting on a housing market crash in Canada, or a sharp decline in oil prices, then the S&P/TSX Composite index is not the place to be. But there are several more likely outcomes that should push the Canadian equity benchmark higher in the coming months.
Matthew Barasch, an equity strategist at RBC Capital Markets, highlighted seven factors that suggest a higher exposure to Canadian stocks is warranted.
First up is valuation, with the TSX currently trading at a discount of roughly 1.5 multiple points to the S&P 500, based on forward earnings per share estimates. That puts Canadian stocks in the bottom quartile of relative forward P/E multiples for the past 20 years.
Next, Barasch highlighted earnings growth, which he expects will come in above 20 per cent in 2017.
The strategist’s forecasts continue to move higher following strong results from Canadian banks and as energy sector earnings continue to recover.
When it comes to bank stocks, Barasch believes they should be trading at higher multiples.
China remains an important driver of equity market returns in Canada, and following weakness in 2015 and 2016, Barasch noted that the world’s second-largest economy appears to have found its footing.
Capital outflows have also stabilized, suggesting the crisis of the past two years is over.
Not only do Canadian banks offer relatively high dividend yields, but the yield on the S&P/TSX Composite is also above (about 80 basis points) that of the S&P 500.
Barasch noted that with oil prices having rebounded substantially in the past year, energy sector yields should rise in the next 12 months.
The strategist also believes the significant improvement in global growth during the past year will boost TSX performance, as the index has demonstrated a tight correlation with consumer confidence during the past two decades.
Lastly, Barasch pointed to the recovery of the Canadian economy, acknowledging that residential housing and energy investment will unlikely make the same contribution they have over the past 20 years.