Last week added to our U.S. equity overweight while reducing further our exposures to our core Canadian stocks in our ETF portfolios. While near-term prospects for global equities look attractive, we think Canada could lag the U.S. over the medium term. As COVID becomes increasingly contained and less feared, we think fundamentals will eventually drive asset prices more sensibly. Over the next 12 to 18 months, we think Canada’s economy and stock market are in a weaker position compared to other major economies, particularly the U.S.
First, Canadian equities were underperforming well before COVID and oil sector woes hit. After a brief period of outperformance in mid-2019 as the trade war raged on, Canadian equities lost its vigour and underperformed most other regions in the 4th quarter of 2019. Hopes over a global growth inflection intensified during this time whereas the domestic economy looked increasingly on weak footing due to softening business Capex, exports and consumer spending. As the global economy recovers from the virus-induced unemployment shock, Canadian consumers are most vulnerable thanks to record low savings rates, historically high debt-to-income and debt service ratios. This means that the economic recovery in Canada will be slower which will weigh on earnings growth as about 40% of revenues are driven domestically, versus over 55% for S&P 500 companies. We continue to prefer an underweight to Canadian equities vs U.S. and EM Asia although Canadian stocks have held up nicely since April (Chart 2).