Canada the Stable

There’s a running joke that the most boring headline ever ran over a 1986 New York Times column: “Worthwhile Canadian Initiative.”

But Canada’s “benign” or “boring” reputation next to its rowdy Southern neighbour hasn’t stopped investors from capitalizing on winning conditions this 2021. In nine of the last 10 years, Toronto’s S&P/TSX Composite Index has trailed the S&P 500, but it’s out to a lead this year with a 7.6% increase.

Bank-Boosted Benchmark

Canada’s use of its policy toolkit deserves much of the credit.

  • Robust government stimulus programs allowed consumers to keep up with mortgage payments and kept businesses solvent during the Covid pandemic.
  • Interest rate cuts kept a booming housing market on pace, and regulators halted share buybacks and dividend increases, which allowed Canada’s banks to shore up their capital bases.

All six of the country’s biggest lenders reported higher net income in the latest quarter than in the previous year. The banks, along with energy and industrial companies riding tailwinds to speedy growth, are raking in profits and boosting the country’s marquee benchmark.

That’s drawn investors previously enamoured with high-growth technology stocks.

  • Canadian exchange-traded funds have taken in over $9 billion in less than three months in 2021. That pace that would blow 2020’s total of $22.2 billion in flows and 2019’s $17.5 billion out of the water.
  • Canadian equity exposure is increasing quickly, too. Although the valuation gap with U.S. stocks remains extremely wide: the TSX is at a 23% discount on a forward price-to-earnings basis.

Montreal-based Fiera Capital — which manages about C$180 billion — think the TSX will beat the S&P 500 this year.

When Hot is Too Hot: It’s not not all roses and sunshine, though. Canada’s housing agency warned last week that the houses are literally selling like hotcakes, driven by a pandemic surge in home prices, and raising the specter of serious overheating. The market is so hot, in fact, that 76% of houses brought to market in the three months ending in December sold in that same period.

the takeaway

High growth is fun, but every now and again sturdy valuations and earnings are sexy, too.

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