By Mackenzie Investments | May 9, 2022

Over the last several years, Canadian investors have had good reason to be envious of U.S. stock performance – especially the explosive growth of technology companies south of the border. But Mackenzie Investments believes that it’s easy to overlook the strength of the Canadian equity market. Read on to learn why now may be the time to reconsider whether your clients’ portfolios have the right exposure to local companies. 

Canadian equities have some serious advantages in today’s environment. First, an economic re-opening is sweeping the globe, driving demand for cyclical growth sectors and natural resources. The equity market also has more reasonable corporate valuations, with what seems to be a lower downside risk. As a bonus, Canadian firms are providing healthy dividends that can enhance returns, while also helping clients stay invested through volatility. You can help your clients take advantage of this opportunity with the Canada Life Pathways Canadian Equity Fund. Mackenzie manages a concentrated portfolio that’s diversified across the Canadian equity market – without being limited to a specific investment style or company size – to focus on the best opportunities for long-term growth.

For years, the U.S. has dominated the league tables in equity market performance, putting up annualized returns that have been the envy of both developed and emerging market counterparts. Canada’s proximity as well as deep historical ties to the U.S. means the feeling of being overshadowed is particularly strong when it comes to comparing investment performance. This is underscored by the fact that the S&P 500 has outperformed the S&P/TSX Composite index in 9 of the past 10 calendar years!1 While this can be a compelling reason for retail and institutional investors alike to continue giving our own market a cold shoulder, there’s a phrase that’s well-heeded by industry professionals: past performance is not indicative of future results. The question, then, is why should we think that a reversal in fortunes could lie ahead for the Canadian equity market? Here are a few of the reasons why we feel particularly constructive at this juncture, and why a Canadian investor should revisit their equity exposure and ensure they have not overlooked an appropriate degree of local content.

An economic re-opening bodes well for Canada’s equity market profile

The pandemic-induced lockdowns and remote work, learning, and lifestyles disproportionately benefited technology-focused companies and those businesses that leveraged technology to enhance their competitive positions. However, the post-pandemic recovery will mean that pent-up demand for more conventional social and business activities that were sidelined or curtailed bode well for cyclical growth sectors that the S&P/TSX Composite’s profile tilts heavily towards. The massive infrastructure upgrades taking place around the world, and recovery in economic growth in developed and developing markets are likely to be energy-intensive, supporting the natural resources sectors that are well-represented with the Canadian market. Our team’s experience investing in leading energy and materials companies with a responsible track record in developing these resources is particularly prudent as investors seek to align their values with their investment decisions.

Valuations appear reasonable

While fiscal and monetary policies have driven the value of risk assets in general higher, on a relative basis, the Canadian market provides investors with attractive return potential without the need to pay a heavy premium for earnings growth expectations. In fact, the S&P/TSX Composite Index has a forward price-to-earnings (P/E) ratio that is in line with its 10-year average, and significantly lower than its U.S. counterpart, the S&P 500, which sports a forward P/E ratio well-above its 10-year average.¹ With valuations being more reasonable within the Canadian market this is indicative that investor expectations on growth have not reached the kinds of frothy levels that can be worrisome. In other words, if earnings results do not meet a high hurdle, Canadian equities may have more downside cushioning to help mitigate against a heavy sell-off. This may be more likely the case when markets are trading at premium valuations, driving investors to make long-term decisions based on short-term factors. The fact that this dynamic is not pervasive throughout the Canadian landscape supports our stronger relative conviction for Canadian equities.

Dividends have some upside, helping enhance the total return potential in Canada

As secular growth managers, we’re not primarily focused on dividends, but we do consider them as an alpha overlay. With a constructive outlook on earnings growth within the Canadian equity market, our team believes that some of those rising profits will be used by companies to reinvest in their businesses, make acquisitions, repurchase shares and raise their dividends. This latter point is an added tailwind for us in the current environment. The Canadian equity market tends to hold an advantage over the U.S when it comes to dividend yields, and that remains the case today, with the dividend yield on the S&P/TSX Composite at a healthy 2.6% compared to the S&P 500, which stands at 1.3%.¹ The potential to see dividend payouts go higher as we move through the economic reopening provides both a return enhancement over the long term and also helps to mitigate the downside risk during inevitable risk-off periods that bring market volatility back into focus. Having this dividend cushion can help reduce investor shock and the temptation to make ill-timed decisions to jump out of equities and imperil their long-term plans – another indirect benefit of attractive dividend yields and rising payouts.

Canadian All-Cap Growth Equity: A long-term strategy that capitalizes on current market dynamics

We have sought to highlight some of the benefits derived from having exposure to the Canadian equity markets in the current environment. However, it is important to underscore our perspective that secular growth opportunities rather than those driven mainly by cyclical expansions and declines are the focus of our strategy to build long-term wealth for investors. These opportunities seek to capitalize on enduring trends such as environmental sustainability, digitization of commerce, aging demographics, and rising global incomes. The team’s extensive experience in capturing alpha goes beyond active management within the large-cap Canadian equity space, to include companies in the smaller and mid-capitalization spectrum, as well as opportunistic exposure to U.S. equities as appropriate from a broader portfolio construction perspective. By including smaller and mid-cap companies, our team benefits from experience in uncovering firms that may not be widely followed by sell-side analysts yet provide unique sources of growth. This can be from new products and services, leveraging proprietary technology, or potentially capitalizing on an ability to consolidate fractured markets. These smaller companies may also potentially benefit from a longer runway for above-market growth before reaching maturity. All this is to say that our team draws on multiple levers to generate alpha, employs a disciplined process to execute our investment strategy, and possesses extensive industry experience that provides the confidence needed to navigate within and across market cycles.