The Canadian stock market’s strong results last year are set to continue, with rising rates setting up the TSX to outperform U.S. equity markets, according to a CIBC portfolio manager.
“Last year at this time I made the prognostication that it’s finally time for Canadian equities to outperform their U.S. peers,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management, in a March 3 interview.
Prior to 2021, the S&P 500 outperformed the S&P/TSX Composite index in nine of the previous 10 years, Jerusalim said. Last year the S&P/TSX still fell a bit short of the S&P 500 on a total return basis but it outperformed the Dow Jones Industrial Average, the NASDAQ and the Russell 2000.
Jerusalim said he’s even more confident that the TSX will outperform U.S. indexes this year. As of Monday, the S&P/TSX Composite was up 1.13% this year while the S&P 500 was down almost 12%.
“The arguments I put forth last year are much stronger and more supportive today,” he said.
First, Jerusalim said the forward price-to-earnings ratio for U.S. equities remains significantly higher than for Canadian stocks. “The TSX is close to one standard deviation below its long-term average, while the S&P 500 still looks expensive at 20 times forward P/E,” he said.
U.S. tech giants have driven growth for the past decade and have come to dominate the S&P 500, but that’s changing. “The law of large numbers and the prospects of rising interest rates make the prior impressive run difficult to sustain,” Jerusalim said, pointing to recent draw-downs in tech stocks, most notably Facebook and Tesla.
The TSX, on the other hand, with its three pillars of financials, energy and materials, is more “cyclically balanced” and likely to benefit from rising interest rates and post-pandemic economic growth.
The energy sector has already had an impressive rebound from its 2020 lows and Jerusalim said there are several reasons to believe the run is sustainable.
Russia’s invasion of Ukraine has sent energy prices soaring as countries ban imports of Russian oil. Global oil inventory levels have been drawn down over the past year and producers remain disciplined on production growth even as demand approaches pre-pandemic levels, Jerusalim said.
Canadian energy producers have record cash flows and are returning money to shareholders “yet still trade close to trough valuation,” he said, and many Canadian companies are among the world’s least carbon-intensive producers.
Further, Jerusalim said there are reasons to favour Canada’s economic rebound from the Covid-19 pandemic. Canada’s vaccination rate and lower death rate has contributed to the strong rebound in employment, and immigration should also boost growth in the coming year.
For these reasons, Jerusalim said the TSX is extremely well positioned to outperform U.S. equities in 2022.
“This won’t be the case every year,” he said. “Let’s enjoy it while it lasts.”
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