Why Canadian equities could (finally) outperform

The S&P 500’s decade-long dominance over its Canadian counterpart may finally be set to end, a CIBC portfolio manager says, as valuations and economic growth prospects now favour Canadian stocks.

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“The S&P 500 has outperformed the TSX in nine out of the past 10 years: since the depths of the financial crisis, the S&P 500 has outpaced the TSX by over 300%,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management.

“But the tide is turning and the case for the TSX over the S&P 500 is about as positive as I’ve seen since the end of the 2005 oilsands boom.”

Low interest rates and unprecedented stimulus from governments to offset the pandemic’s effects have pushed up stock prices, putting valuations into rare territory as investors see no alternative to equities.

“But the magnitude of the divergence is about as wide as it’s been since the tech wreck of 2001,” Jerusalim said in an interview last month. The S&P 500 was trading at about 10 times higher in February than its 25-year average, he said, compared to about six times higher for the S&P/TSX composite.

Prospects for economic reopening and a corresponding global growth spurt also favour the cyclical-heavy TSX. Canadian energy producers could benefit from higher carbon reduction standards than producers in other markets, Jerusalim said — a point emphasized in last week’s Alberta budget, which prioritized promoting the oil industry’s environmental, social and governance measures.

Jerusalim also said a “super-cycle” of mergers and acquisitions that’s just starting will favour Canadian equities.

“With generationally low interest rates and lots of money sitting on the sidelines, the theme of corporate consolidation and growth is at its infancy,” he said.

Resource companies stand to benefit but also the Canadian tech sector and other “global champions” such as the Brookfield Group, Intact Financial and Saputo, which could make acquisitions, he said.

Canada is also in a better position than many other Organization for Economic Co-operation and Development countries when it comes to population growth. While the pandemic hurt immigration, Jerusalim said investors can count on a return to prior levels and the corresponding boost for economic growth.

“Putting all this information together, I wouldn’t be advocating for a disproportional amount of one’s asset allocation being invested in the TSX,” he said.

But after more than a decade of investors shifting assets to U.S. equities, “there is a clearly good case to be made for why the TSX could finally begin a period of outperformance relative to its southern counterpart.”

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