FACING NORTH

Investors say it may be right time to buy Canadian.

After one of the worst quarters for Canadian stocks since 2011, market watchers say it may be time to start buying Canada again.

Brian Belski, chief investment strategist at BMO Capital Markets, said the S&P/ TSX composite index, excluding energy stocks, is now trading at a price-to-earnings ratio below its long-run average after its third-quarter decline put the index down nearly 10 per cent for the year.

At the same time, Canada should increasingly benefit from a strong U.S. economy in the next year, bolstering the earnings of TSX-listed companies.

“Canadian stocks fell into correction territory in Q3; however, we believe that much of the bad news is now priced in and Canada should become increasingly correlated to a strengthening U.S. economy,” Belski said in a note.

There were a couple of encouraging data points for Canada this week, including better-than-expected GDP data for August. The World Economic Forum also ranked Canada’s banks as the world’s soundest for the eighth year in a row.

Greg Taylor, vice-president and portfolio manager of equities at Aurion Capital in Toronto, said his firm is eyeing deals in the market.

“We’re getting close to the point of pulling the trigger,” he said. “I think we might see a shaky October, setting up for a bounce in November and December. And in that scen- ario, if I were to say anything, I would say it’s time to start looking at financials, because the first sector that bounces when people come back to the market is financials.”

It has been tough to be a bull on Canadian stocks since 2010, with the S&P 500 set to trump the S&P/TSX composite for the fifth straight year.

Much of the recent underperformance has been due to Canada’s slumping economy and fears over what the crash in oil prices will do to the country’s red-hot housing market. BMO Capital Markets notes that short interest in Canadian stocks has been steadily increasing this year, and is now at its highest level since the summer of 2014.

But sentiment may be shifting.B elski said Canada’s economic indicators have consistently beaten expectations so far in the second half. He also said that much of the panic over the energy sector has subsided, with most analysts now seeing oil prices as “low for longer” — a view that potentially benefits energy companies if oil prices surprise to the upside.

Taylor believes defensive and quality stocks will lead any rally on the TSX if one materializes toward the end of the year.

“You’re going to see a bit of a defence trade, and maybe a bit of a value trade in the next few months,” he said. “I think the next leadership is going to come out of financials, and then a defence trade.”

Belski identified real estate investment trusts as another space that could help lead a rally. He notes that valuations have steadily declined this year and are firmly below historical averages.

But he also warns against investors being overly bullish on Canada. He still expects the S&P 500 to beat the TSX in the long term, given the “inconsistency of emerging markets, reliance on commodities and reluctance to seek other more stable alternatives.”