Canadian Stocks versus the US

In his most recent report entitled “Diversification or De-Worsification,” Ian de Verteuil, along with his colleagues, examines the move by domestic mutual funds and pension plans to move away from Canadian public equities over the past ten to fifteen years.  

 

• Canadians have shifted mutual fund dollars in CDN equities from 55% to 29% in the last 15 years

• US and international commitments have risen to about 70%

• Pension plans in Canada have reduced their exposure to publicly traded equites in favour of alternative investments over the last five years from 40% of total assets to 26%

• The percentage ownership of Canadian equities by the Maple Eight (CPP, PSP and six provincial plans) of Canadian publicly-traded equites has declined dramatically

 

The analysts question the desirability and necessity of this slow shift to an underweight position.  While Ian and his fellow analysts agree that the Canadian market offers limited liquidity in some areas and exhibits low exposure to health care and technology, the history of performance of the TSX is compelling (Exhibit 2) as are the current valuations (Exhibit 4).  While there are other reasons we could site for the widening valuation gap between Canadian and US stocks, the authors note that “less support from two of the larger domestic institutional buyer groups has inevitably had a negative impact on Canadian equity valuation.” 

We conclude that Canada offers compelling valuations in some sectors of the TSX index and we continually monitor the market for opportunities that may be overlooked by large pension plans and mutual funds. 

 

Exhibit 2: Global Indices - Total Return Performance - Select Time Periods

Source: Bloomberg and CIBC World Markets Inc. 30-yr Avg is the average of annual returns over the past three decades

 

Exhibit 4 - Forward P/Es - S&P/TSX and S&P 500 P/Es and P/E Spread - 2000 to Current

Source: FactSet and CIBC World Markets Inc.

 

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To read the full report, click the link below: