Investors return to Canadian stocks

As the global economy picks up speed, investors are dusting off the Canada playbook.

COVID -19 vaccinations are gaining momentum and fiscal support is helping the growth outlook, lifting bond yields. That's a winning set of conditions for the nation's value-oriented and cyclical stock market, which is outrunning its U.S. counterpart in 2021 after years of lagging performance.

“Canada has what you want” in the current landscape, said Mike Archibald, vice-president and portfolio manager at AGF Investments, a unit of Toronto-based AGF Management Ltd., which has $39.8 billion in assets under management.

The S&P/TSX Composite Index has trailed the S&P 500 nine of the past 10 calendar years but is beating the U.S. benchmark in 2021 with a 7.6-per-cent gain.

That's largely because of banks, which are producing a gusher of profits, and energy and industrial firms that are riding economic tailwinds.

Global investors have overlooked Canada for years in favour of countries with greater choice in high-growth technology stocks, primarily the U.S., but valuations and earnings momentum have become attractive, Archibald said.

Canadian equity exposure is also increasing, according to Bank of Nova Scotia analysts. They say the valuation gap with U.S. stocks is still “extremely wide,” with the TSX at a 23-per-cent discount on a forward price-to-earnings basis.

“We have started to notice some flows into Canadian-branded equity funds (and) funds/ ETFs this year,” strategist Hugo Ste-Marie wrote in a note to clients. “The bleeding of the past few years could be over if the macro landscape improves as we expect.”

Canadian exchange-traded funds have taken in more than US$9 billion in less than three months this year, according to data compiled by Bloomberg Intelligence analyst James Seyffart. That's well ahead of last year's pace, which saw a total of US$22.2 billion of flows, or about US$1.9 billion a month, and 2019 at about US$17.5 billion.

“The reflationary environment of robust global growth prospects and unrelenting monetary policy support are likely to embolden sentiment towards the previously-battered value space and prompt a re-rating in the S&P/TSX,” Candice Bangsund, vice-president and portfolio manager at Montreal-based Fiera Capital Corp., said via email.

Bangsund, whose firm manages about $180 billion, predicts Toronto's index will beat the S&P 500 this year. Financials are nearly one-third of the benchmark; rising rates and an improving economy help insurers such as Manulife and Sun Life as well as banks, which see wider lending margins and reduced loan losses.

But hiccups in reopening economies could lower growth expectations.