What’s Not To Like About Canada (And Its Stocks)?

What’s Not To Like About Canada (And Its Stocks)?
Theodora Lee Joseph, CFA

10 months ago2 mins

When people think of North America, it’s the US that usually pops to mind. As an investor, however, you’d fare well to get to know its quieter neighbor to the north – Canada. In the past 12 months, the S&P/TSX, the benchmark Canadian index, outperformed the S&P 500 by more than 7% – and there’s good reason to think that outperformance will continue.

For one thing: despite their better performance, those north-of-the-border stocks are still reasonably priced and they’ve factored in higher odds of a recession relative to their US peers. The TSX (black line) is still trading at least five points lower on price-to-earnings (P/E) multiples compared to the S&P 500 (red line).

For another: Canadian stocks offer a way to bet on a rebound in China’s demand brought by the reopening of its economy. After all, Canada’s a major commodities exporter – so its market boasts a lot of agriculture, fertilizer, and oil and gas stocks that are driven by Chinese consumption.

And lastly: in a higher interest rate environment, stocks with higher dividend yields are more valuable. The TSX’s average dividend yield of 3% is almost double that of the S&P 500, and its free cash flow (which helps sustain those dividends), has recently surpassed the S&P 500 for the first time since 1998.

But before you hit Bay Street (Canada’s Wall Street equivalent) for a stock shopping spree, it’s worth mentioning the country’s housing market, which could present a near-term risk. Compared to US homeowners, Canadian homeowners have shorter-term mortgages (typically, with a five-year lock-in period, or less, as opposed to a 30-year), so they’ll feel the impact from rising interest rates a lot quicker. But with the Bank of Canada recently signaling a pause in rate hikes, there looks to be some relief. To gain some northern exposure, you could consider the iShares S&P/TSX 60 Index ETF (ticker: XIU; expense ratio: 0.18%).



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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