With an increase of 6% over one year (in €), the Canadian stock exchange is a withdrawal against many others, especially that of the United States, up 22% over the same period. And yet, the country still has significant assets, and we continue to invest in them as part of our neutral and dynamic portfolios. Here’s why.
Rising interest rates weigh
If the Canadian stock market lags behind its American neighbour, it is primarily because the economic dynamics are not the same at this stage. While the United States signed an excellent second half of 2023, with an average growth of 3%, the Canadian economy has stagnated since the spring of 2023.
Households, the engine of the economy, suffer. Inflation has eroded purchasing power, and the rise in interest rates has hurt very badly. In a country where household debt is close to 180% of disposable income, debt charges peak at 15%—a problematic financial situation impacts their confidence, which only experienced lower levels during the pandemic. Naturally, consumer spending has been affected and is falling per capita.
Added to this is the decline in real estate prices, an unusual phenomenon in a country where residential property prices have risen by 7.3% on average since 1971. This undermines the wealth effect households have enjoyed for decades. The decline in real estate investment in 2022 and 2023 also played a significant role in the meagre investment and the Canadian economy.
Ultimately, suppose the latter has stayed afloat in recent quarters. In that case, the Canadian population continues to grow, increasing total consumption while consumption per individual is declining. Government spending continued to rise, and exports performed well.
A very different stock exchange from the American
However, it is impossible to justify the performance gap between the Canadian and US stock exchanges without looking at the composition of the equity markets. The relative weight of the information technology sector explains part of this difference: on the MSCI USA, the industry weighs 30% of the total (Apple, Microsoft, Nvidia in the lead) and this, not even counting the other magnificent seven, high-tech companies that fall into other categories, such as Alphabet (Google), Amazon, Meta (Facebook), or Tesla.
The composition of MSCI Canada is quite different. The financial sector reigns supreme, accounting for 35% of the index. As we know, with the rise of interest rates, fears around the financial sector are essential. Investors fear a surge in defaults that would hurt the sector’s beneficiaries. But the news on this front is somewhat reassuring. Well-capitalized, very diversified, and with significant pricing power, the country’s banks have maintained good stability. Other key sectors of the Canadian stock exchange include the energy sector (18% of the total), industry (13%) and then only information technology (10%), followed closely by raw materials (9%). This is a stock exchange with a more traditional and solid profile, of course, but which does not benefit from the fashion effect related to technology or artificial intelligence.
However, it should not be overlooked first because it sells at a much lower price than the world stock exchange and then because it is much more generous in dividends (on this point, the level of dividends is twice that of the American stock exchange). And finally, beyond 2024, marked by a very gradual recovery in activity, the outlook for the Canadian economy for the medium and long term is rather good.
With a bright future
The recovery should be in crescendo. Gradually, inflation returned to the 2.0% target defended by the Bank of Canada (2.9% in January). While policy rates remain unchanged at 5.0% since the summer, financing conditions are easing somewhat as investors and banks begin to anticipate a fall in the cost of credit. This will give more and more air to households: Having reached 30 million inhabitants in 1998, Canada is now approaching 39 million, a 30% growth over just over a quarter of a century that helps keep the economy afloat and support demand, particularly in the residential real estate market.
Resource wealth and energy self-sufficiency will also play an important role, providing investors who wish to settle in Canada with long-term visibility that they do not necessarily benefit from elsewhere.
Add to that the integration of Canada into the North American market. At a time when the latter is experiencing a real boom in investment, Canada (rich in raw materials and with a highly skilled workforce) is well-positioned to benefit. American dynamism will remain an essential vector of growth. In our eyes, These factors will allow the country to rebound and make it an attractive bet for the future.
Less fashionable than its neighbour to the south, the Canadian stock exchange retains excellent assets. Rich in raw materials, a significant producer of hydrocarbons, and with an excellent capacity for innovation and a very promising demographic profile, the Canadian economy remains promising a bright future, especially since it is an integral part of the northern economy and will continue to enjoy the insatiable appetite of the United States.
Undervalued against the euro, the Canadian dollar contributes to our interest in the country’s assets, which we believe are cheap. We invest in it as part of our balanced and dynamic portfolios.
