David Rosenberg: Why now's the time for investors to buy Canada
By David Rosenberg and Marius Jongstra
Global interest rates are on the rise, the economic outlook is clouded (at best) and commodity prices have been hit since the start of the year. While it is hard to dispute that a leveraged, small, open economy reliant on commodity exports such as Canada will not be immune to these forces, our Strategizer model has seen a positive divergence of late between the S&P/TSX composite and S&P 500 outlooks.
Indeed, we have highlighted this before, but it is worth reiterating that much of this has to do with a better margin for safety built into current valuations. While the S&P 500 has gained 17 per cent year to date on the back of investor optimism that a recession will be avoided, the S&P/TSX composite has been rangebound — trading between about 19,500 and 20,500 or so, and only notching a five per cent advance on the year.
Beyond attractive valuations, we believe that fundamentals more appropriate of the economic reality, a positive technical divergence, and constructive outlooks on the sectors representing more than half the TSX are all reasons to favour Canadian equities compared to their U.S. peers.
Valuations have ballooned back to elevated levels in the United States, while remaining in check north of the border. For example, the current forward P/E multiple sits at 19x for the S&P 500 and is just 13x for the TSX. The gap, at six multiple points, is sitting at historically depressed levels (based on data back to 2006 — the time horizon Strategizer looks back on) and marks an extreme two-standard-deviation event.
Even relative to interest rates, the equity risk premium at 390 basis points in Canada presents a much more attractive risk/reward profile than the lowly 100-basis-point
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