What’s ahead for Canadian and U.S. equities

Canadian equity investors awaiting better TSX performance might get their wish.

In a weekly economics report, CIBC chief economist Avery Shenfeld says, “We could be due for a spell where the Canadian benchmark outperforms its U.S. counterpart.”

However, that outperformance could be more the result of challenged U.S. equities, rather than any upward moves on the part of Canadian equities.

Read: Could the TSX rebound in 2018?

For example, U.S. stocks have been challenged by such things as high prices earlier this year in response to tax cuts, as well as markets’ initial unwillingness to recognize the Fed’s path of normalization, says Shenfeld. More recently, tech giants are being challenged as regulators zero in on privacy.

Read: Outlook for equities as rates rise

For Canada, a negative for the market has been the price differential between Canadian and U.S. crude and natural gas. In a weekly equities report, BMO senior economist Robert Kavcic notes that energy is down more than 10% on the year. But the oil and gas sector might soon be turning a corner.

With markets having already beaten up on relative valuations for Canadian names, “another source of Canadian underperformance may now be behind us,” says Shenfeld. “It’s hard to see Canadian natural gas pricing or the transportation bottlenecks from Alberta getting any worse, and they might get very gradually better.”

He adds that NAFTA concerns, while not going away, at least aren’t getting worse.

Rebalance equities

Any relative outperformance on the part of Canadian equities might not mean much, however, when currency is considered.

In a weekly financial digest, BMO chief economist Douglas Porter notes that the TSX’s 2018 performance has been particularly poor in U.S.-dollar terms, “with a currency adjusted setback of nearly 8%.” Such performance “reinforces the view that Canadian growth is likely to trail well behind that of the U.S. through this year and probably next.”

Adds Shenfeld: “Economic growth this year still favours the U.S., given the huge fiscal stimulus being delivered stateside. But as markets look ahead to 2019, both economies will be facing the constraints of full employment, and running at a sub-2% pace.”

That means caution on the part of investors, who “might want to rebalance their U.S. and Canadian weights, rather than rush into an overall higher weighting in stocks overall,” he says.

North American markets aren’t the only ones facing challenges. Last week, equity markets struggled across the board, with tech sector weakness, notes Kavcic. (Tech is still among top performers on a relative basis this year, “with the Nasdaq clinging to positive territory,” he says.)

“Regionally, none of the major markets on our board have posted positive returns this year (aside from the Nasdaq), with Canada, Germany and Japan all down more than 5%,” he says. The S&P 500 has experienced its first negative quarter since Q2 2015, he adds.

Read the full reports from CIBC, Kavcic and BMO.

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