BofA Securities equity and quantitative strategist Ohsung Kwon provided good news for domestic investors, making a compelling case that the S&P/TSX Composite Index will outperform the S&P 500 Index over the next decade.
An ongoing regime change, where deflation, low rates and globalization give way to inflation, de-globalization and rising commodity prices, is the main reason Kwon expects that Canadian equities outperform. “The expected bullish cycle in inflation and commodities should result in an outperformance of the TSX over the next decade,” he wrote in a research report.
The national benchmark is cash-rich and dividend-rich, making it more resilient to market volatility. Adjusted for market capitalization, the TSX returns twice as much as the S&P 500 for the first time. Canadian stocks also carry more cash than US stocks once market capitalization is taken into account.
The Bank of Canada accelerated interest rate hikes to a greater extent than the Federal Reserve, leaving US equities facing more hikes to come. BofA also estimates that ultimately the domestic policy rate will stop at 4.5% versus US rates at 5.0%. This would make monetary conditions easier and more conducive to growth in Canada.
S&P/TSX composite valuations are more attractive than south of the border. Kwon calculates that based on the current TSX price-earnings ratio, investors can expect average annual returns of 6.5%, plus 3.4% in dividends, over the next ten years. . This compares favorably to the implied annual total return of the S&P 500, close to 8.0%. (He cautions, however, that valuation levels are a poor indicator of short-term returns.)
BofA also considers the domestic stock market to be better prepared for a possible recession. Based on the equity risk premium (ERP, essentially the difference between the return on earnings and the return on risk-free bonds), the TSX reflects an 80% probability of recession. Kwon estimates that the S&P 500 ERP represents only 5.0% recession preparedness.
Canada should also benefit from the expected trend towards de-globalization. As manufacturing capacity returns from the developing world, Canada’s status as the United States’ largest trading partner could attract new investment.
The military conflict and energy shortage in Europe underscore Canada’s attractiveness as an investment destination according to current trends. Mr. Kwon wrote, “Canada is uniquely positioned on energy and food security, as well as political stability, which we believe is essential in the 2020s.”
— Scott Barlow, Globe and Mail Market Strategist
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actions to ponder
Shawcor Ltd. (SCL-T) Year-to-date, Shawcor’s stock value has nearly doubled, making it the 10th best performing stock on the S&P/TSX SmallCap Index. The stock still has a unanimous buy call from seven analysts and is trading at a steep discount to its historical average multiple. Jennifer Dowty reviews the investment case to find out why Shawcor shareholders are having a great year.
Stay away or recover stocks? Investors weigh choice as market slides
As markets tumbled, cautious investors have reduced their equity holdings this year in favor of safer ground, lured by higher yields on everything from Treasuries to money market accounts. Still, some investors are starting to worry that staying on the sidelines could eventually cost them dearly once the market turns. Missing out on a few big gaining days can reduce overall returns over time, while previous market lows have been marked by furious rallies that rewarded those who held on in stocks. Lewis Krauskopf reports from New York.
Also see: Bearing Buyers Could Be Burned Again As Another US Stock Rally Weakens
Central bankers are in fantasy land and we are all going to pay the price
Economist David Rosenberg has some very harsh words for Canadian and US central bankers as they continue to hike interest rates at a breakneck pace and disrupt asset prices.
The next global financial crisis could linger around the corner
Analysts cut Canadian dollar forecast as recession risk looms
Big banks for your GICs? Stop laughing and discover their special rates
On savings accounts, the big banks just don’t want to compete with the best rates available. The same can generally be said for guaranteed investment certificates, but there are exceptions that crop up from time to time. Now is one of those times, as Rob Carrick tells us.
Don’t just buy the dip – buy the crash too
Many investors and economists will tell you to “buy the dip”, but few will also say to “buy the crash”. Often, investors and economists fall silent between a 5% and 25% downdraft, disappearing from public view or expressing hesitation to buy into the market. Instead of snacking and adding positions during sales, they are plagued by panic, paralysis and fear. In the process, they miss the opportunity to acquire stocks at low prices, forgetting that at one, three, five and 10 years stocks are often higher. Philip MacKellar from The Contra Guys explains and has a suggestion on a stock to buy right now.
Untangling Luck and Skill in Investing
What is the relationship between luck and skill in the following activities: choosing lottery tickets, organizing a race and investing? Most people would say choosing lottery tickets is luck. And that the result of a run is all ability. But what about the investment? Biff Matthews has some insight.
Canadian cannabis stocks rise after Biden pardons offenses and calls for law review
Shares of Canada’s biggest cannabis companies jumped sharply on Thursday after US President Joe Biden announced plans to review the drug’s classification under federal law and said he would forgive Americans for having already committed cannabis-related offences. While past hopes for sweeping legalization have repeatedly been dashed after reaching the US Senate, analysts say this recent market rally reflects investor enthusiasm — and impatience. reports Irène Galéa.
Others (for subscribers)
An accountant: 11 Highest-Ranking US Stocks Showing Price Momentum in Beaten Sectors
Number Cruncher: 14 Balanced Fund Alternatives for the Crazy Investor
The TSX’s Highest Paying Stocks, Plus Risk Data
Friday analyst upgrades and downgrades
Thursday analyst upgrades and downgrades
Thursday’s insider report: CEOs are buying these three stocks analysts are bullish on
Ask Globe Investor
Question: Is John Heinzl considering starting a new portfolio now that his five-year returns are known, as he did with his previous dividend portfolio model?
Answer: No. I intend to continue managing the current portfolio. The previous model portfolio was liquidated in 2017 after five years as it was part of The Globe and Mail’s Strategy Lab series, which was coming to an end. This is not the case with the current wallet. As always, I will continue to notify readers whenever I buy or sell a title.
What’s up in the coming days
Ian McGugan looks at the market volatility we’re seeing this month and explains why investors are misplaced betting on a central bank ‘pivot’.
Click here to view Globe Investor’s earnings and economic news calendar.
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Compiled by Globe Investor staff