The investing world is understandably focused on the U.S. After all, it’s the biggest economy, has the largest stock market, is home to the some of the best-known companies and, admittedly, the political spectacle in Washington can be entertaining at times. As a result, the U.S. frequently steals the limelight from its neighbor to the north.
In my view, Canadian stocks are essentially a play on global economic growth and commodity prices. As such, it should come as no surprise that the TSX Composite has chronically underperformed the S&P 500 Index alongside a structural commodity bear market and weakening Canadian dollar, a so-called commodity currency, for the better part of a decade.
Moreover, an environment of trade wars, economic policy uncertainty, sluggish global growth, as well as Canadian dollar and commodity price weakness, doesn’t do Canadian stocks any favours.
Nonetheless, I believe Canadian stocks enjoy some advantages that may be underappreciated by the marketplace.
First, Canada was one of the earliest countries to navigate a path out of the trade wars with the U.S. Of course, I’m referring to the signed trade agreement between Canada, the U.S. and Mexico. While I look forward to it being fully ratified, it’s no panacea. Canada is heading into a federal election later this month, so policy uncertainty is elevated, but it’s far from the extremes seen in the U.S., China and the rest of the world. As a result, Canadian businesses have relatively better visibility when it comes to spending, investment and hiring.
Second, the JP Morgan Global Manufacturing Purchasing Managers Index (PMI), which is still slightly below the boom/bust line of 50, has ticked up over the past couple of months. In other words, the industrial side of the world-wide economy remains weak, but may be showing early signs of improvement.
Third, the Canadian manufacturing outlook remains positive, suggesting business owners are already seeing light at the end of the tunnel, which bodes well for TSX returns.1
In my mind, Canadian and emerging market equities would both benefit from the same developments. If the U.S. and China eventually reach a trade agreement, I believe most of the remaining headwinds facing Canadian equities would likely dissipate. Stay tuned.