Five reasons to stay in Canada when investing
Compelling opportunities around the corner
Given the benefits of diversification, we would normally not complain that Canadians are finally investing abroad, but the magnitude and timing of this shift is cause for concern since investors are notorious for making such decisions at the wrong time.
For example, investors were herding into resource stocks and everything Canadian at the tail end of the commodity bull market that ran from 2001 through the end of 2007. This isn’t surprising as the S&P/TSX composite index delivered a 7.4-per-cent annual return over this period compared to the S&P 500’s 3.3 per cent. Seven years later, they are now doing the opposite: selling Canadian equities and moving international, especially south of the border. The S&P 500 is up 15 per cent per year since the end of 2008, while the S&P/TSX composite is up 9.1 per cent.
The top 10 inflows this year have been into U.S. equity ETFs, which had $697 million of inflows, EAFE equity ETFs ($620 million) and other international equity ETFs ($230 million), according to a recent National Bank Financial ETF Strategy report.
Canadian equity ETFs experienced more than $1.5 billion of outflows.
This trend is expected to continue over the remainder of the year, especially as U.S. equities rebound back to new highs.
According to the Q4 2015 Adviser Sentiment Surveys conducted by Horizons ETFs Management (Canada) Inc., 78 per cent of investment advisers are bullish on the S&P 500 heading into the fourth quarter, up significantly from 37 per cent in the previous quarter.
It’s hard to blame investors for exiting Canada given all the uncertainty facing its economy, but we think things are about to change, which could present a compelling opportunity. Here are five reasons investors should look to stay at home, at least for the time being.
Long bear commodity cycle nearing its end
There are signs that we are approaching the bottom of the ongoing bear commodity cycle, after slowly working through a massive surplus of inventory caused by seven years of overcapitalization at the start of the millennium.
The big question is if China and other emerging countries have also reached their lows and can finally provide a much-needed boost to global demand. Closer to home, there has been a lot of deal flow lately in the Canadian oil and gas sector — including a hostile offer, plenty of asset sales and a couple of friendly deals — which is a positive sign that the sector is getting cleaned up.
Potential fiscal stimulus
No matter who gets elected, the message is loud and clear that Canadians are worried about the economy and desire additional fiscal stimulus, which generally boosts equity markets in the process.
Falling loonie impact
The Canadian dollar has been crushed, falling 27.5 per cent from its 2011 high to hit its lowest level since 2004 when measured against the U.S. dollar. Since the majority of this drop has occurred since July 2014, we believe the impact has yet to show up in our economic numbers but soon will. That should provide a boost to corporate earnings and trade flow.
Strong housing market
The Canadian housing market continues to defy gravity, surprising all of those trying to bet against it. Even in Alberta, resale prices have barely budged despite more than 40,000 jobs being cut. This is very important as it keeps consumers feeling confident and spending.
Attractive valuation
Finally, from a valuation standpoint, the S&P/TSX composite is trading at a full 10-per-cent discount at 14.8 times forward earnings compared to the S&P 500 at 16.5 times.
There is room for this multiple discount to narrow once investors get comfortable with the forward outlook from corporate earnings, which are about to show the benefits of the falling Canadian dollar.
In the interim, S&P/TSX investors get an extra oneper-cent dividend yield over the S&P 500’s two per cent.