Invesco Canada blog

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Brian Tidd | March 4, 2022

Relative value In Canadian equities can still be found after a robust 2021

After strong performance in 2021, Brian Tidd, Lead Portfolio Manager with the Invesco Canadian Equity Income team, says he’s still finding relative value in Canadian equities in 2022. 

As bottom-up fundamental investors, we’re not the type to reposition the portfolio at the beginning of each year based on our macro-outlook.  We do pay attention to what is going on in the economy, but it doesn’t drive our investment behaviour — rather, valuations do.

This brings us to the topic of where we are currently finding value. Despite being up 21% in 2021, valuations for Canadian stocks, as represented by the S&P/TSX Composite Index, are trading at a significant discount versus the U.S. benchmark S&P 500 Index, as you can see illustrated in the chart below.

Source: Factset as of January 31, 2022. When the S&P/TSX – PE – NTM (next 12 months) relative to the S&P 500 line is below 1 standard deviation, then the TSX is priced very cheap relative to U.S. When it is above the 1.0 standard deviation, then the TSX is priced more expensive relative to the U.S.

Canadian stocks are trading at around 14 times earnings, which sits below the 5-year average, and compares favourably to the S&P 500 which is trading at around 19 times earnings. The relative value situation holds for most sectors.1

This notion of value in Canadian stocks lines up with where we’ve found attractive investment opportunities over the last couple of years, and we’re bullish on the Canadian companies we own in Invesco Pure Canadian Equity Fund/Class.

The S&P/TSX Composite Index has historically done well when global economic growth is accelerating, largely because of its concentration in sectors like energy, materials and financials. We think the Pure Canadian Equity Fund/Class should benefit from a cyclical recovery, but I wouldn’t characterize it as simply a resources or cyclical “play.” We aim to opportunistically invest in resource stocks to the extent they meet our strict investment criteria, and, when the risk-reward profile is, in our view, particularly attractive.

We have been pruning some of our “winners” lately to manage our overall exposure. Our aim is to outperform through stock selection versus making overt sector bets. For example, for our Canadian Plus Dividend Fund, our energy investments were up 75% vs 47% for the benchmark in 2021 despite being markedly underweight the sector.2

While the funds we manage are coming off a strong year of performance in 2021, we believe the share prices for many of our portfolio holdings continue to trade at a discount to our assessment of fair value.  We’re happy with how the portfolios are constructed today in terms of quality, valuation, and level of diversification, and we believe our funds are positioned to perform well over time and endure periods of high economic uncertainty. We also believe our investment approach applied to the recently launched Invesco Pure Canadian Fund/Class provides a differentiated and attractive way for investors to gain exposure to Canadian equities using a truly actively managed solution.

1 Source: Factset as of January 31, 2022

2 Source: Invesco as of December 31, 2021

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Important information

Image: Studio Marmellata/ Stocksy

Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Please read the simplified prospectus before investing. Copies are available from your advisor or from Invesco Canada Ltd.

On July 30, 2021, Invesco Canadian Endeavour Fund was renamed Invesco Pure Canadian Equity Fund and the Fund’s investment strategies and portfolio managers were changed. The performance of this Fund for the period prior to this date would have been, and the quartile rankings may have been, different had the current investment strategies and portfolio advisor been in place during that period.

The opinions referenced above are those of the author as of March 1, 2022. 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.