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Craig Jerusalim, senior portfolio manager at CIBC Asset Management.
I wanted to start by recapping performance. The S&P 500 has outperformed the TSX in nine out of the past 10 years. Since the depths of the financial crisis, the S&P 500 has outpaced the TSX by over 300%, but the tide is turning and the case for the TSX over the S&P 500 is about as positive as I’ve seen since the end of the 2005 oilsands boom.
Let’s start with looking at valuations. Stocks in general are expensive and for good reason: interest rates are low, stimulus measures are high, pent up demand from the consumer. But the magnitude of the divergence is about as wide as it’s been since the tech wreck of 2001. The S&P 500 is trading at about 10 times higher than its 25-year average, while the TSX is trading at only about six times higher than its average.
But it’s not all about valuation, it’s also about growth. Once we get past this Covid scenario and the reopenings begin with all major engines firing all at once — that being Asia, North America and Europe — and that’s historically been good for commodities and the cyclically sensitive TSX. We also know the strong global growth is good for commodities like oil and gas that Canada produces. Now with a prudent focus on environmental, social and governance it is important to highlight Canada’s world-leading standards when it comes to carbon production and carbon reduction. While it’s important for the world to wean itself off fossil fuels, it’s too disruptive for that to happen all at once. And it’s much better for society for the barrels needed to be produced to come from a country like Canada, where environmental precautions and adherence to socially responsible practices are followed cautiously.
A final motivation in favor of the TSX is the M&A super cycle that has only recently begun. With generationally low interest rates and lots of money sitting on the sidelines, the theme of corporate consolidation and growth is at its infancy. And it’s not just Canadian resource companies that will benefit but Canada’s technology sectors in hubs like Montreal, Ottawa, Vancouver and Toronto has ballooned beyond the likes of just Shopify and Constellation. And it’s not just Canadian companies being targeted by larger foreign entities either. We’re also seeing some of our global champions like the Brookfield Group, Intact Financial and Saputo establish themselves as global leaders competing on the world stage.
Another often overlooked case for Canada is population growth. Canada’s aging population doesn’t immediately come to mind when one thinks of population growth, but once you add immigration, which will surely start to get back to prior levels, it more than compensates for our birth rate to project Canada to the top of the population charts amongst developed OECD countries. All you have to do is spend about 10 minutes on social media and it’s easy to see why people from all over the world are clamouring to migrate to a safe, accepting, progressive country like ours with strong rules of law. Many of the people migrating to Canada are on compassionate grounds, fleeing persecution from their homelands, but many more are also choosing to come to Canada as their best opportunity for their own and their offspring’s future prospects. While the latter group brings more immediate economic prosperity, both groups are bringing strong work ethics, higher education, and especially entrepreneurial spirits that are translating into more jobs and more prosperity for our great country.
So putting all this information together, I wouldn’t be advocating for a disproportional amount of one’s asset allocation being invested in the TSX. But to the extent that the relative shifting of assets to be moving south for the past few decades there is a clearly good case to be made for why the TSX could finally begin a period of outperformance relative to its southern counterpart.