Why the TSX may outperform in 2022
Attractive forward price-earnings ratios, better cyclical balance, vigorous immigration & strong employment all point to the TSX outperforming in 2022
Why the TSX may outperform in 2022
[Soft music plays]
[Craig Jerusalim, Portfolio Manager, Candian Equities,
CIBC Asset Management]
Last year at this time we published a somewhat divisive white paper outlining why we
thought it was finally time that Canadian equities could outperform their U.S. peers.
[Financial data on a screen. Images of Canadian flags.]
Well, it may be unCanadian to brag, but now it is safe to say that Canada may have finally
gotten its groove back, and our confidence is even greater now relative to that 2021 call, that
this year 2022 will be another year of outperformance for Canadian Equities.
[The S&P 500 or the TSX?]
Prior to last year, the S&P500 had outperformed the TSX in nine out of the prior 10 years.
During that stretch, the TSX had risen a respectable 115%, but that return was completely
overshadowed by a monstrous tripling of the S&P 500 over that time. To be fair, 2021 was a
little bit of a push. The S&P/TSX did outperform the Dow Jones Industrial Average, the
Nasdaq, and the Russell 2000, but it fell a tiny bit short of the S&P 500 on a total return
basis. But the arguments we presented last year are much stronger and more supportive
[10-year performance - S&P/TSX Composite Index vs. S&P 500]
[S&P/TSX Composite Index (CAD) S&P 500 (CAD)]
[*Source: Bloomberg, in Canadian dollars, cumulative total returns (including reinvestment of
dividends) from Jan. 3, 2012 to Jan. 31, 2022]
[A line chart that compares the performance of the S&P/TSX Composite Index vs. S&P 500
from 2012 to 2022.]
Last year at this time, we noticed a decidedly wide deviation between the forward price-toearnings ratio of the TSX and the S&P 500. The TSX was slightly more expensive than its
20-year average of about 16.2x forward earnings, while the S&P 500 was trading about 5
multiple turns higher than its long-term average 16.7x.
Today, there is a similar five multiple gap between the S&P 500 and the TSX, except today,
the TSX is close to one standard deviation below its long-term average, while the S&P 500
still looks expensive at 20x forward P/E.
The second main point in our argument was composition of the indices.
[An aerial view of Google headquarters in San Francisco. Social media icons on a phone
screen. An aerial view of downtown San Francisco]
The S&P 500 is dominated by technology companies and technology-like companies such
as Meta, Amazon and Google. The FAANGMA stocks as they’re essentially known, have
powered the past 10 years of growth for the S&P 500, but the law of large numbers and the
prospects of rising interest rates may make the prior impressive run difficult to sustain.
[A person scrolls through Facebook on a phone. A person drives a Tesla. Thumbs up icons
followed by thumbs down icons on a screen.]
We’ve already seen some of those pillars start to crack with the likes of Facebook and Tesla
experiencing 30% drawdowns.
[A split screen image containing stock market data displayed on the side of building, an
aerial view of a hydro-electric dam, and a close-up of a steel girder.]
Conversely, The TSX is much more cyclically balanced, with its three main pillars, financials,
energy and materials benefiting from rising interest rates and the economic growth we’re
expecting post the COVID recovery.
[Energy stocks on the rise?]
One of those sectors, energy, has already had an impressive rebound off its 2020 lows, and
we’ve seen oil surge higher in recent weeks.
[An offshore oil derrick at sunset. An aerial view of a hydro-electric dam.]
However, there are many reasons to believe in the sustainability of this energy bull run.
[Oil derricks on the side of the road in Alberta. The exterior of OPEC headquarters. An aerial
view of an oil pipeline in Alaska.]
Over the past year, we’ve seen global inventory levels being drawn down, DUCs or drilled
and uncompleted wells, as they’re called, are a leading indicator, and they have fallen to
cyclical lows. All while producers remain quite disciplined on their production growth even
while demand begins to approach pre-COVID highs. More specifically, the Canadian energy
producers have already repaired their balance sheets, are generating record free cash and
returning that cash to the shareholders, yet still trade close to trough valuations.
[Smoke billows from the chimneys of an oil refinery. An aerial view of a refinery in the Alberta
And while some people criticize the carbon footprint of oil producers, it is important to point
out that our Canadian producers are amongst the least carbon intensive and most ESG
conscience producers in the world.
[A windmill located offshore in Prince Edward Island. An aerial view of a field of solar
As well, providing balance to the energy sector is the relatively high 3% allocation to the
renewable companies on the TSX that should benefit from the next few decades of
[Canada's COVID-19 response]
Rounding out some of the tailwinds Canada has over the U.S. in a post-COVID world, is our
thoughtfulness through COVID.
[A low angle of a Canadian flag. A row of vials containing COVID vaccines. A needle goes
into a vial. An arm is cleaned in preparation for a needle.]
Our population has a much greater vaccination rate, a much lower death rate, and that’s
contributed to the strong rebound in employment.
[People perform varies jobs, including a factory worker, a lab worker, a waiter and a barber.]
Canada has recovered more than all of its lost jobs during the pandemic and has seen its
participation rate get back above 65%, while the U.S. lags a few percentage points behind.
[A plane lands at the Calgary airport. A woman in a mask looks for a taxi at the airport. A
man in a mask holds a Canadian flag and looks into camera.]
But really one of Canada’s superpowers is its strong immigration policy that will target over
400,000 new Canadians or more than a 1% boost to its population.
[A doctor rights on a patient’s chart. A scientist looks into a microscope.]
The highly skilled and educated new Canadians give a boost to growth and stimulate the
overall economy making up for the lackluster birth rates problematic in many developed
All of the tailwinds just mentioned, plus the higher expected earnings per share growth for
the TSX due to its cyclical growth composition, plus the much lower starting valuations
positions the TSX extremely well to outperform U.S. equities in 2022. Now, this won’t be the
case every year, so let’s enjoy it while it lasts. Go Canada!
[Soft music plays]
[The views expressed in this video are the personal views of Craig Jerusalim and should not
be taken as the views of CIBC Asset Management Inc. This video is provided for general
informational purposes only and does not constitute financial, investment, tax, legal or
accounting advice nor does it constitute an offer or solicitation to buy or sell any securities
referred to. Individual circumstances and current events are critical to sound investment
planning; anyone wishing to act on this video should consult with his or her advisor. All
opinions and estimates expressed in this video are as of the date of publication unless
otherwise indicated, and are subject to change.
™The CIBC Asset Management and the CIBC logo are trademarks of Canadian Imperial
Bank of Commerce (CIBC), used under license. The material and/or its contents may not
be reproduced without the express written consent of CIBC Asset Management Inc.
Certain information that we have provided to you may constitute “forward-looking”
statements. These statements involve known and unknown risks, uncertainties and other
factors that may cause the actual results or achievements to be materially different than the
results, performance or achievements expressed or implied in the forward-looking
The information in “10-year performance - S&P/TSX Composite Index vs. S&P 500” was
prepared by CIBC Asset Management Inc. using Bloomberg data.]
[The CIBC logo is a trademark of CIBC, used under license.]
What rising rates and inflation mean for Canada’s economy
“Not all rate hike cycles certainly end in recession” says CIBC’s Avery Shenfeld. He adds that some companies should tolerate higher interest rates.
WHAT RISING RATES AND INFLATION MEAN FOR CANADA’S ECONOMY
It seems like as soon as central banks start raising interest rates and we're seeing that
in both the U.S. and Canada, you get those stories about the R word that is recession.
[The exteriors of the Federal Reserve and the Bank of Canada.]
People start to worry that a rate hike cycle inevitably has its conclusion, not just in
easing inflation, but sending the economy spinning downward.
[The Federal Reserve in Washington. The European Central Bank in Frankfurt.]
And while that has sometimes been true in past tightening cycles, there have been a
number of cycles where the central banks hiked rates for a while, then paused or even
eased rates a bit, and the cycle continued. And I would argue that if you look back to
where we were in 2019, we were exactly at that point.
[The exteriors of the Federal Reserve and the Bank of Canada.]
The Bank of Canada had stopped raising rates at relatively low rates of interest and the
economy was still moving forward. And the U.S. had actually started to ease off a little
bit on interest rates in 2019 and might have averted a recession if not for the
emergence of COVID-19.
[A man wears a mask and looks out the window. Busy hospital hallways.]
So not all rate hike cycles certainly end in recession, and there are some reasons to
expect that Canada and many Canadian-listed companies should be able to tolerate
higher rates of interest than we've now seen in the past.
[Can Canadians tolerate higher rates?]
Even if you look at Canada's household sector, albeit a very indebted household sector,
it's not like the first couple of years of rate hikes are going to be all that much of a
squeeze on that sector of the Canadian economy.
[Aerial views of suburban neighbourhoods in Canada.]
Remember that the mortgages, for example, that will come due in 2022 and 2023.
These were mortgages that typically, if they were four- or five-year mortgages, were
taken out before the pandemic at interest rates that are probably quite close to where
mortgage rates will be over 2022 and 2023.
[Images of people signing mortgage documents. A man is handed a folder and a set of
So, they'll be higher than they were at the height of the pandemic. But those mortgages
won't come due until 2024 or 2025. The Bank of Canada also understands the debt
level of Canadians and should be careful to perhaps pause on the way towards higher
interest rates to make sure that the economy is living with that. Ultimately, we do see
short-term interest rates getting into the sort of mid 2% range in both the U.S. and
[Images of people wearing masks in a city. Vials of COVID-19 vaccines.]
That should be something the economy can live with over the medium term if COVID
manages to behave itself and not return to a full force anytime soon.
[Outlook for investors]
The question is for investors, how much of a dent does this do? It certainly has raised
concerns about companies that have all their earnings way off in the future because
you're now discounting that flow of earnings at a higher interest rate. So the growth
companies that don't have a lot of current profitability certainly have been marked down
by the equity market. It does pose a bit of a challenge for companies whose only value
is as a substitute for bonds.
But then there's a whole group of companies that will benefit from the ongoing growth in
the Canadian economy. It is, after all, that growth that is compelling central banks to
start raising interest rates. And therefore, there certainly should be elements of the
equity market that benefit more from the further improvement in economic activity than
they're hurt by the rise in interest rates.
We are, of course, monitoring the spike in inflation. The longer it persists, the more
there will be a concern that central banks really have to dole out severe punishment to
the economy to get that back down.
[A shipping barge docked in ice. An empty warehouse. An empty supermarket. The
But we do believe that some of the inflation we're seeing today is still the remnants of
supply chain difficulties caused by COVID, as well as, more recently, the war in Ukraine.
And as we look ahead to 2023, at least those elements of inflation should give way to
much lower rates of inflation on things like energy prices and other things impacted by
the war. And we're hoping that therefore it only takes a modest cooling in economic
growth in Canada, in the U.S., and therefore a relatively moderately paced dose of rate
hikes to get overall inflation back under control. We'll be keeping an eye on that
forecast, of course. But as I said at the outset, no hard and fast rule that central banks
have to err on the side of causing a recession. And certainly, a number of cases in the
past where they've successfully managed to pool growth without taking the whole
economy down with it.
[This video is provided for general informational purposes only and does not constitute
financial, investment, tax, legal or accounting advice nor does it constitute an offer or
solicitation to buy or sell any securities referred to. Individual circumstances and current
events are critical to sound investment planning; anyone wishing to act on this
document should consult with his or her advisor. All opinions and estimates expressed
in this video are as of the date of publication unless otherwise indicated, and are subject
The CIBC logo is a trademark of Canadian Imperial Bank of Commerce (CIBC).
The material and/or its contents may not be reproduced without the express written
consent of CIBC.]
[This logo is a trademark of CIBC, used under license.]
How to stay balanced in volatile markets
While the current volatility is unsettling, it’s important to remain calm and focus on the long term. Craig Jerusalim, Senior Portfolio Manager, CIBC Asset Management, provides insights on navigating the current market situation.
How to Stay Balanced in Volatile Markets
[Soft music plays]
[Onscreen Text: Craig Jerusalim, Portfolio Manager, Canadian Equities, CIBC Asset Management]
Craig: Markets are really experiencing some unprecedented moves right now. The drop in oil, 20 to 30 percent in one day. The drawdown in the broad indices is really unprecedented in the scale and the speed of which it's dropped. And the problem right now is no one can give definitive answers, definitive answers of when the Coronavirus is going to be cured or when the imminent recession is going to come or not come. And it's really that fear of the unknown that is causing some market participants to panic. And there's no answer that I can give to fully allay fears of an imminent V-shaped bounce back, because no one knows for certain that that's what's going to happen.
Advice for clients really has to be in line with what you feel comfortable, what risk you feel comfortable taking on. However, don't try and time the market. All the evidence we've seen over history is that investors are really poor at getting out as the market is dropping and then getting back in when the market's rebounding. There's really only one mistake an investor can make throughout the history of investing, and that's selling at the bottom. If you miss just the 20 best days over the past 20 years, you would've wiped out 100 percent of your returns over that time period for the TSX. So instead, be comfortable with your asset allocation and be able to perhaps either dollar cost average in or dollar cost average out to help alleviate some of those fears.
[Onscreen Title: The importance of long-term investing]
Craig: Today's market price is probably not the low, tomorrow's low probably won't be the cycle low either, but we don't know when that rebound is going to happen. And there are a number of differences between the situation today and the situation in 2009, for example, during the financial crisis.
Today, there's a factor, the Coronavirus, that is causing people to just tighten up and cause people to not go out and spend, not travel. And that's causing a short-term demand impact. However, unlike in 2008 and 2009, there's not massive fraud in the system. There's not excesses in valuations or any bubbles forming. The U.S. consumer, for example, is much healthier today than they were in 2008. Saving rates are high. Debt service ratios are low. Unemployment is extremely low. So, there's reasons to believe that there's going to be some sort of built up demand that will come back to the market when those fears alleviate. We also know that interest rates are extremely low at all-time record lows and that the federal government is there for monetary and fiscal stimulus, as well as many other countries around the world that are going to be throwing everything they can at this economy to get it moving again. We don't know when that's going to happen, but we know we want to be positioned for it. So, we're not throwing out the babies with the bathwater or using the opportunity to high-grade portfolios to move to the highest quality companies, to be best positioned for that rebound when it happens.
[Onscreen Title: Portfolio positioning]
Craig: There's two sets of assets that we need to think about. The asset where the allocation is a little bit more flexible, where you could raise cash and you can move more defensive. And there's another set of assets that are going to stay fully invested. And that's the money that we're managing for clients, for the money that's staying fully invested in mutual funds, for example, we're not sitting on our hands and doing nothing.
[Onscreen Text: Five indicators we are watching in our portfolios]
Craig: There's five things that we're doing within those funds.
[Onscreen Text: 1. Look at company balance sheets]
Craig: The first is looking at balance sheets. Any company that is at risk in the short term, due to their leverage, is something that needs to be taken out of the portfolios. We have to be invested in the companies that can use this market disruption to their advantage as opposed to it causing risks from an ongoing basis.
[Onscreen Text: 2. Identify potential switch trades]
Craig: The second thing is we're looking for switch trades, which companies with similar exposures are down more than others because right now everything is moving lower. But at different paces. So, we're looking for the switch trades in the portfolio.
[Onscreen Text: 3. Look for overreaction in company shares]
Craig: The third thing is we're looking for companies that have just overreacted: which companies have are discounting a worst case scenario, recession, even though the cash flows are still recurring and ongoing.
Craig: The fourth is we're looking for the opportunities in the companies that have recurring earnings, that have domestic focused earnings, because we think that Canada is going to be less impacted than some other emerging markets around the world. We're looking for the companies that we know where their next dollar is going to come from. Think about all the companies whose bills you receive every month that you're going to continue to pay. Those are the telcos and the utility companies.
Craig: We're starting to sharpen our pencil on those cyclical companies. The companies that are down the most now but are likely to snap back at the time when the stimulus and the recovery begins. We're too early at this stage, but sharpening the pencil and getting ready for that rebound is important.
[Onscreen Text: The views expressed in this video are the personal views of Craig Jerusalim and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this document are as of the date of publication unless otherwise indicated, and are subject to change. ®The CIBC logo is a registered trademark of the Canadian Imperial Bank of Commerce (CIBC), used under license. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. Certain information that we have provided to you may constitute “forward-looking” statements. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or achievements to be materially different than the results, performance or achievements expressed or implied in the forward-looking statements.]