(Runtime: 3 min, 46 sec; size: 2.55 MB)
Craig Jerusalim, senior portfolio manager at CIBC Asset Management. I specialize in dividend and GARP mandates.
Canadian equities have had a decent return this decade with a holding period total return of approximately 60% or 5.5% annualized. That’s not bad unless you compare it with the 104% return for the MCSI World Index or the 171% return for the S&P500. And that gap gets even wider when you look over the past 30 years where the TSX’s annualized return was 7.7% versus 11.5% for the S&P500. We know Canadian investors suffer from a home country bias, allocating a greater proportion of their savings to Canadian securities relative to Canada’s global share.
So I wanted to address the TSX’s prospects for outperforming the S&P500 in 2019. One large reason why the TSX’s recent under performance over the past decade is the makeup of the Canadian index relative to the US bench mark. Mega cap technology giants like Microsoft, Apple, Google and Amazon have been fueling US growth while the resource heavy TSX has been hampered by lackluster energy in material prices.
Both of the meta-trends should begin to subside. The super power tech names will be hindered by the laws of large numbers, more intense regulatory oversight and stressed valuations. While both gold and oil prices should benefit from the US dollar pausing its assent in conjunction with the Fed’s downshifting the pace of interest rate increases.
Energy prices are vital to the Western Canadian economy and energy related stocks make up close to 20% of the TSX before including the banks and the energy and construction companies and other indirectly exposed companies.
Alberta’s new coordinated energy policy, as well as crude by rail, have helped decrease the discount for Canadian crude. And production cuts from OPEC, Russia and Alberta should help reverse oil’s Q4 2018 slide.
Some evaluation perspective. The TSX is set up nicely heading into 2019. The TSX is at 14 1/2 times trailing price to earnings. It’s not only trading about 1 1/2 times cheaper than it’s longer term average, but it is also trading at about 1 1/2 times cheaper than the US market. This discount is in contrast to the average premium that the TSX has historically traded at. Although valuation isn’t always the best predictor of future returns, it does provide a nice buffer in the event if economic conditions take a turn for the worst.
Turning to the growth side of the equation, the US saw a massive 20% earnings growth over the trailing 12 month period versus 14% for the TSX. The year over year comparison now becomes much more difficult for the US and as such, the consensus for its earnings growth outlook for the TSX outpaces the US market by about 3% to 4% for 2019. So the TSX is currently cheaper and has superior growth prospects relative to the S&P500.
A final nod in the TSX’s favour over the S&P500 from a total return prospective is the dividend yield, where the TSX’s incremental 1.2% yield may end up carrying a lot of weight within the context of these volatile markets.
So in conclusion, it is always a good idea to diversify exposures. But from my vantage point, it appears as if the TSX is set up well to outperform US markets in 2019.