Uh “O Canada”
We proudly sing “with glowing hearts we see thee rise” as part of our national anthem. Unfortunately, when comparing the performance of Canadian stocks to U.S. stocks over the last three decades my heart aches. At least we are in good company with value, small cap, international and emerging market stocks!
Our Home And Native Land
Canadian stocks make up around 30% of a typical 40% fixed income/60% equity balanced portfolio. While this is significantly larger than Canada’s 3% share of the global equity markets, it makes sense to have a home country bias given the currency risk of non-Canadian stocks, the tax advantage of Canadian dividends, and Canadian investors’ knowledge of the Canadian economy, market, and companies. I measured the performance of Canadian versus U.S. stocks using the methodology of my previous blogs. In this case I divided the total return of the S&P TSX Composite Index in U.S. dollars by the total return of the Russell 1000 index of large cap U.S. stocks.
From Far And Wide
How does the performance of Canadian stocks compare to the rest of the world? Chart 1 below adds the relative performance of Canadian stocks (green line) to Chart 2 from the European Vacation blog that showed emerging market, value, small cap and international stocks versus the Russell 1000. I have also shaded the recessionary periods in gray. While there are a lot of lines in the chart, the message is that since the data started in 1987 all the indices have underperformed the U.S., with Canada having the second worst relative performance. While not shown in the chart, this translates into an annualized return of 8% for Canada, which is lower than the 11% return for the U.S. but better than the 5% return for international stocks. The last time Canada outperformed the U.S. was from 2001 to 2011.
Chart 1
Source: MSCI, FTSE Russell, Morningstar, Fama/French, Yahoo Finance
Chart 2 below zooms in on the relative performance of the same stocks in Chart 1 from the end of last year to September 30th. The numbers on the right show the amount of relative underperformance. Emerging markets are the best of a bad lot, doing 7% worse than the Russell 1000. Value stocks did a whopping 28% worse.
The blogs I wrote on value, small cap, emerging market, and international stocks used data to the end of May. Since May, emerging markets have performed a bit better than the U.S. (driven by Chinese stocks) and Canadian stocks have performed about the same. Small cap and international stocks are down slightly. Oh, and value stocks are even more value than ever![1]
Chart 2
Source: MSCI, FTSE Russell, Morningstar, Fama/French, Yahoo Finance
We Stand On Guard For Thee
After outperforming U.S. stocks for the ten years ended 2011, Canadian stocks are on track to have underperformed for the last decade as we enter 2021. While there is no clear answer as to when this trend will end, it has got a bit long in the tooth, and Canadian stocks are at their cheapest to the U.S. since the tech bubble of 1999. Uh “O Canada”, my experience tells me now is not the time to reduce the weight of Canadian stocks in a portfolio.
Invest Wisely,
Dave Schaffner, CFA
Principal, Wayfairer Capital Management Ltd.
[1] Low cost ETFs are available for all of the markets shown in the charts.
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2 Comments
Given the recent “re-flation” narrative (expected inflation + rising real rates), it appears that Canadian equities are bound to benefit! What are your thoughts on this narrative?
Having spent a couple of decades managing fixed income portfolios, experience has shown me how hard it is for anyone to forecast inflation, deflation or reflation. With that caveat, I would expect there to be more stimulus coming in Canada and the U.S. to combat the effects of Covid while we wait for enough people to get vaccinated. While there may be some limited reflation, I doubt the stimulus would result in any permanent increase in inflation. As I said though, it is hard to accurately forecast, and my preference is to stick to the evidence that active managers, despite spending considerable resources on forming views on the economy, markets and companies, have a hard time outperforming low cost indexed funds or ETFS. I would also be guided by the long term data that shows Canada has underperformed the U.S. for along time. This really increases the odds in your favour that something, whether it is reflation or other factors, will come along to drive some relative outperformance in the next few years.