Bloomberg recently published a story asking if Canada’s equity market was the ugly duckling of global stocks. Between energy, financials and even healthcare issues, nobody seems to want anything to do with Canadian equities. Our neighbours to the south aren’t facing nearly the same aversion from investors.
Dundee Economics Chief Economist Dr. Martin Murenbeeld lays out the outlook for equity markets in both countries.
“In light of the low level of interest rates in the U.S., particularly the 10-year yield, the price-to-earnings ratio of the S&P 500 is not high. We believe strongly that a P/E ratio must be looked at within the context of interest rates. If interests are very low then a higher price-to-earnings ratio is perfectly defensible," Dr. Murenbeeld told WP. "We don’t think the S&P 500 is overvalued and we’re certainly of the opinion that 2100 is very achievable in the near term. The index might get another little hit if the Fed raises rates in December but I think investors generally understand that the Fed will remain very supportive of equity markets. For these reasons we are constructive on the S&P 500."
The fly in the ointment for U.S. equities is an overseas development such as the modest devaluation of the renminbi in August, which sent the S&P 500 into a downward spiral. Such events are difficult to predict. However, Dundee Economics had written in their June Economic Monitor
that equity markets were overdue for a correction. The team hypothesized that large equity market corrections tend to occur in the fall and that the Fed was looking to reopen discussions on a rate hike, which would further increased the likelihood of a correction. As it happened, the correction came late summer.
The state of commodity prices and a low Canadian dollar add complications to Canada’s equity market scenario.
“Investors in Canada have been better served by investing in the S&P 500; they benefited directly from the decline in the Canadian dollar,” said Dr. Murenbeeld. “The Canadian market has also suffered from the decline in resource prices. But with a lower dollar some of the damage is mitigated in Canadian dollar terms, meaning we are constructive at this point on the Canadian equity market.”
Resource companies based in Canada, whose entire mining activities are carried out in Canada, have benefitted more from the lower Canadian dollar than more international resource equities. Many non-resource companies have also benefitted from the lower Canadian dollar.
“There is another way to look at equities, the way an advisor might when considering clients’ portfolios. The advisor can invest clients’ money in Canadian real estate, invest it in domestic government/corporate debt, invest it in domestic equities, or invest it in cash,” said Dr. Murenbeeld. “Of these four, which would an advisor like best - or dislike least? The reality is that there are not too many attractive domestic alternatives to the domestic equity market.”
In general terms, in other words, Dundee prefers to be in equities.