Invesco Canada blog

Insights, commentary and investing expertise

Talley Léger | October 10, 2019

Is long-term Canadian equity underperformance coming to an end?

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.













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1 Canadian Federation of Independent Business (CFIB) Business Barometer, September 2019. The Canadian Federation of Independent Business is a non-profit business organization representing the interests and concerns of over 110,000 Canadian owners of small and mid-size enterprises to all three levels of government.

Important information
Diversification does not guarantee a profit or eliminate the risk of loss.
A repo is when one party lends out cash in exchange for a roughly equivalent value of securities, often Treasury notes. This market exists to allow companies that own lots of securities but are short on cash to cheaply borrow money.
An inverted yield curve is one in which shorter-term bonds have a higher yield than longer-term bonds of the same credit quality. In a normal yield curve, longer-term bonds have a higher yield.
Risk assets are generally described as any financial security or instrument, such as equities, commodities, high-yield bonds, and other financial products that carry risk and are likely to fluctuate in price.
The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market. The Toronto Stock Exchange is a stock exchange in Toronto, Ontario, Canada. It is the 9th largest exchange in the world by market capitalization.
The S&P/TSX Composite Index is the benchmark Canadian index.

Past performance is no guarantee of future results. All investing involves risk, including risk of loss.

The opinions referenced above are those of the author as of Sept. 23, 2019. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.