There’s a simple and somewhat depressing reason your Canadian stocks cannot seem to keep pace – corporate Canada just does not make enough money.
While the U.S. market is running lean with a capital-light, tech-rich composition that is enviously profitable, ours is a market that is capital-intensive, laden with commodities and weak in the earnings department.
Over the past 20 years, the earnings power of companies in the S&P/TSX Composite Index has declined by nearly 30 per cent against their U.S. competitors, according to data compiled by Canaccord Genuity.
So it’s probably not a coincidence that the main Canadian stock index is trading at a 30-per-cent discount. That gap is just about as high as it has ever been.
Weak corporate profitability isn’t just a drag on domestic stocks. It also reinforces the narrative that the Canadian economy is in trouble. Deep worries have arisen in recent months over the country’s poor productivity record, waning competitiveness, and declining GDP per capita.
“There’s so much Canada bashing right now,” said Martin Roberge, a portfolio strategist at Canaccord Genuity. “The good thing is that you’re not necessarily limited to Canada when it comes to managing your money.”
Foreign investors made that realization long ago. Reliable buyers of Canadian stocks for decades – sinking an average of $12-billion into this market each year – international investors pulled an astronomical $49-billion out of Canadian stocks in 2023.
The selloff has seeped into this year, with an additional $2.7-billion of net outflows seen in the first two months, according to Statistics Canada.
It’s hard to escape the conclusion that investors globally don’t see Canada as an attractive place to put their money to work.
On the home front, however, the investing community remains beholden to the TSX. There has been some shifting of focus to global markets, but nothing resembling the violent reversal of foreign interest in Canada.
The average Canadian investor has more than half of their stock portfolio in the domestic market. So long stretches of poor TSX performance have real implications for the retirement plans of multitudes of Canadians.
For the patriotic saver, it hasn’t been a great decade. The Canadian benchmark index has fallen short of the S&P 500 in eight of the past 10 calendar years. Same old story this year, with the TSX well behind.
Over that time, U.S. returns have outpaced Canadian by a factor of more than 2.5 to 1. Profitability is at the heart of that shortfall.
The U.S. market has evolved into a tech juggernaut, with relatively low capital requirements, fat profit margins and cash to burn. Two weeks ago, Apple Inc. announced a plan to buyback US$110-billion worth of its own stock, which is larger than the market capitalization of all but one TSX-listed company – Royal Bank of Canada.
There’s little hope of the TSX catching up to the U.S. stock market in terms of profitability. More than half of the TSX is weighted in capital-intensive sectors, including energy, materials, industrials, utilities and telecoms.
The S&P/TSX Composite Index has a paltry 10 technology stocks, accounting for just 8 per cent of the index’s market value.
But here’s the kicker. Even if you remove tech stocks from the equation, corporate America is still beating Canada on profitability.
“It’s not just tech or growth stocks,” Mr. Roberge said. “It’s also in the way that U.S. companies are running their businesses.”
As a TSX loyalist, the best you can hope for is pockets of cyclical outperformance based on strength in commodity prices, which is exactly what has shaped up of late. It’s a silver lining, but a faint one.
You can probably make the case that there’s value in the bargain-basement Canadian stock market. And for foreign investors, the beaten-up loonie might be an additional draw.
A cheap stock market and a cheap currency – it doesn’t exactly fill one with Canadian pride.
Tim Shufelt