You would think global investors would look to Canada for investment opportunities that are not available elsewhere. With our very small economic imprint, Canada is easily overlooked.
I recently wrote a series of reports on Canadian opportunities for European family offices. Several facts caught their attention. Facts that perhaps Canadians are familiar with:
● By land mass, it’s the second largest country in the world, with a mere 39 million residents
● The average citizen age is 28
● Fortress strong banks that are continuously ranked as world leaders
● 80 percent of the country’s electricity production is non-emitting, owing to the wealth of hydroelectric resources, nuclear and a small but growing share of wind and solar.
● 23% of Canadians are foreign-born. Perhaps surprisingly, 50% of the residents of greater Toronto are foreign-born
● Controlled immigration is a substantial asset as Canadian immigrants are typically better educated than native-born.
● Averaging 400,000 legal immigrants entering Canada each year, this nation has welcomed more people, per capita, than any other major industrialized nation
The Canadian diversification opportunity for foreign investors- what’s not to like?
There are major differences in sector weights between the S&P/TSX Composite Index (or as Canadians call it, “the TSX”) and the S&P 500. Canada has four dominant sectors; financials, energy, industrials and basic materials. The U.S. market is more broadly diversified, with stronger representation by: consumer, pharma, information technology.
Data as of September 30, 2022; source S&P Dow Jones Indices, State Street Global Advisors SPDR
The S&P / TSX index holds both large and smaller capitalization stocks, with the Canadian median capitalization stock being one-tenth the size of its U.S. counterpart. Canadian exposure would allow foreign investors greater exposure to mid-cap resource and energy companies.
The largest TSX sector is finance, at a 35.5% weight. Canadian banks are known globally for their strong balance sheets, consistent earnings growth and attractive yields. The banking sector within the TSX is attractively priced after Canadian banks declined 13.6% YTD.
Energy stocks, with a 19.2% weighting in the TSX have performed very well against the broader markets in 2022. In spite of strong performance thus far in 2022, Canadian energy stocks are still being priced cautiously. Investors have not yet valued this sector on the basis that conventional energy demand will be strong for decades to come.
Industrials and materials combine for a 24.2% weight and could contribute significantly to performance. Canada is an important producer of such critical minerals as aluminum, cobalt, copper, graphite, nickel, and uranium.
I think it makes a lot of sense to own both the TSX and the S&P 500. Over the long term, the S&P 500 has superior performance, but the TSX offers significant diversification (which has been particularly useful in 2022).
Now might be the time to add a little Canada with the TSX trading at 13.6x earnings compared to 19.35x for the S&P500.
Thoughts, agreement/disagreement? email me at tim@mortonir.com
Tim Morton, CFA is a retired portfolio manager with 45 years of experience working with private clients and is the editor of mortonir.com and a contributor to Barron's.