Skip to content
Scotia Wealth Management

5 Reasons to Invest in the Canadian Stock Market Right Now

Financial Advisor Breaks Down Why You Should Invest in Canada

May 11, 2021

Some of us may also have a bit of envy for our American neighbours, and one reason might be financial. As a Canadian investor, it’s been excruciating to watch Canadian stocks consistently underperform our American counterparts.

I’m sure you already love Canada for so many reasons. Maple syrup and poutine. Cape Breton coastlines and Rocky Mountain peaks. Beavers and deep-fried beaver tails. Hockey and ringette. Good people and stable government.

But some of us may also have a bit of envy for our American neighbours, and one reason might be financial. As a Canadian investor, it’s been excruciating to watch Canadian stocks consistently underperform our American counterparts.

As a result, many Canadians have reduced their Canadian positions and transferred funds to their US stocks.

And I want to talk about why this isn’t necessarily a good idea.


Can you blame Canadians for this decision? Not one bit. No more than for being Leafs fans…

As of March 31, 2021, the S&P/TSX recorded an annual compound return of 6.14% vs. the S&P 500’s equivalent return of 16.48%.

To add salt to the wound, over the same 10-year period, the Canadian dollar declined in value (against the USD), creating a currency gain for Canadian investors holding US stocks.

According to a Scotiabank Equity Research paper dated March 22 2021, the underperformance of Canadian equities may be coming to an end.

It’s time to show our neighbours that, in addition to the best butter tarts on the continent, we also have what it takes to make investors “happy.”

Here are five reasons Scotiabank analysts feel it’s time to overweight Canadian stocks.

1. High exposure to global growth

As readers of this blog, you have heard me repeat the “pillars of growth” existing around the world:

  • Excess liquidity (check your “fat” savings accounts)
  • Huge monetary and fiscal support (check out the Federal Liberal’s projected budget deficits)
  • Lockdowns abating (hopefully very soon)
  • Vaccinations accelerating (many of the eligible and the eager have had at least one shot)

Consensus is calling for the US GDP to grow by 5.6% in 2021 (5.3% for Canada) and 4% (also 4% for Canada) in 2022. Growth in the US bodes very well for the TSX, which generates just shy of 60% of its sales outside of Canada (between 2017 and 2019). In comparison, the S&P’s foreign sales account for just over 40%.

So as the world economy expands, the TSX should benefit more than the US.

2. Relative earnings per share (EPS) momentum shifting in Canada’s favour

Remember, over the long term, it’s the company’s earnings that drive stock prices up or down. If earnings increase, stock prices usually follow (and vice versa).

During the last decade, the earnings of US companies grew at a faster clip than Canadian companies and led US stocks to advance at a faster pace.

However, recently the earnings momentum of Canadian companies has been rising faster than their US peers. The reversal is driven mainly by the acceleration in commodity prices (see recent gas prices).

If commodity prices continue to trend higher (as expected by the Scotiabank analyst), the TSX should outperform the S&P returns.

3. You want to own the sectors found in Canada

Remember, Financials account for 32% of the TSX index, so if the Financials are healthy, so is the TSX.

The Scotia analyst expects bank earnings to experience a strong bounce because of GDP growth, intense real estate/mortgage activity, rising interest rates, and strong capital markets (i.e. mergers and acquisitions, IPOs and secondary issues).

The icing on the cake is the potential for banks reversing their credit losses.

In 2020, the banks increased loan losses in anticipation of major losses due to the pandemic. But in reality, bankruptcies dropped by 30% and banks did not experience the projected credit losses.

Better than expected loan losses should allow the banks to reverse some of the credit provisions and increase earnings in 2021 and 2022.

And with some luck, later in 2021, the authorities (OSFI) may allow the banks to increase their dividends from their current juicy levels (3.5%-4.5%). And you know how much I love dividend increases.

In addition to the Financial, the TSX has a 24% weighting to energy and material stocks.

And guess what?

If the Biden administration carries out its promise to spend $2T on infrastructure and clean energy, it will boost the demand for all commodities. And in Canada, we are blessed with commodities, such as lumber, copper, oil and gas.

So, if the banks and the energy stocks do well, the TSX should outperform the US in the coming years.

4. Buy the TSX when it’s cheap

At the moment, the forward price to earnings ratio of the TSX is 16.3 times vs. the S&P 500 21.3 times. That’s a discount of 23%, and it’s rarely been that cheap.

So there’s ample room for mean conversion over the coming years.

5. Investors are beginning to notice Canada… again

Over the last several years, Canadian and foreign investors have fled the Canadian stock markets. A reduction in demand for Canadian stocks contributed to the TSX’s underperformance.

Recently, for the reasons mentioned above, we have noticed an increased domestic and foreign demand for Canadian stocks. The analyst believes that increased demand will lead to higher Canadian stock prices.

If you find yourself envying the 10-year returns of the US markets, I want you to remember what Dorothy said to her dog in The Wizard of Oz:

“Toto, I have a feeling we’re not in Kansas anymore.”

If it’s been awhile since you’ve seen the movie, please allow me to interpret. We’re in a different place now, and Canada’s underperformance against our US cousins may be ending.

Don’t abandon your Canadian stocks just when the tide could be turning in Canada’s favour.

If your portfolio underrepresents Canada, please give me a call and we can discuss the opportunities available in the Canadian market.

Never Retire Profile

David Foster

“I believe that everyone gets three rounds in their life,” says musician, songwriter, composer, arranger, producer, and recording artist David Foster. “For me, two are completed and I’m on to Round Three. I think you have to change it up every round. My mantra is retreat and attack in another direction, which I’ve done twice. Now I’m going to do it again.” A member of the Order of Canada and the Order of British Columbia, Foster has won 16 Grammy Awards and written songs for artists such as Mariah Carey, Barbra Streisand, Chicago, Celine Dion, Earth, Wind & Fire, Natalie Cole, Whitney Houston, Michael Bublé, and many more. He may be best known for some of his movie soundtracks (The Bodyguard, Urban Cowboy, St. Elmo’s Fire) or, most recently, for being profiled in the 2019 documentary film, Off The Record. Or perhaps he’ll be best known for his next tour or next album, as he is a big fan of the Never Retire philosophy.

The process of finding a financial advisor can be overwhelming. It is our job to make that process simpler and easier.

Dri Financial Group’s proprietary Wealth Navigator Process is designed with you in mind.

Its structured framework helps you make an informed decision and feel confident in our team and management practices before we get started.

We offer you a range of services from creating bespoke financial plans and providing investment advice to helping you take advantage of our investment models. If you would like more information on the Wealth Navigator Process or our team, call me any time at 416.355.6370 or email me at richard.dri@scotiawealth.com.
—

Beyond helping you manage your finances, we take pride in motivating, educating and helping you expand your financial literacy. We are here to answer any questions you have and to help you feel in control of your financial destiny.

If you are ready to dive deeper into your financial literacy journey, we have a wide range of free tools and educational resources available.

Legal

This publication has been prepared by Scotia Capital Inc. and is intended as a general source of information only and should not be considered as personal and/or specific financial, tax, pension, legal or investment advice. We are not tax or legal advisors and we recommend that individuals consult with their qualified advisors before taking any action based upon the information contained in this publication. Opinions and projections contained in this publication are our own as of the date hereof and are subject to change without notice. While care and attention has been taken to ensure the accuracy and reliability of the material in this publication, neither Scotia Capital Inc. nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of such material and disclaim any liability resulting from any direct or consequential loss arising from any use of this publication or the information contained herein. This publication and all the information, opinions and conclusions contained herein are protected by copyright. This publication may not be reproduced in whole or in part without the prior express consent of Scotia Capital Inc.