Investors who fear getting sucked into frothy stocks should look for opportunities across the northern U.S. border, Bank of America strategists say.
The bank argued on Tuesday that valuations for Canadian stocks look more attractive than those of the United States and should warrant further scrutiny by U.S. investors.
The S&P 500 trades at 21.4 times earnings over the next 12 months, the highest level since the collapse of tech stocks two decades earlier, while Canadian stocks in the S & P / TSX Composite Index rise. are 17 times. Bank of America says it’s a two standard deviation haircut, the biggest since the tech bubble.
“We think the haircut is overdone, especially when the composition of the TSX is much better positioned to take advantage of the global economic recovery, which we believe is intact,” the strategists said.
Since the start of the year, the Canadian benchmark TSX is up almost 16% compared to 13% for the S&P 500.
The bank added that when the haircut was more than one standard deviation below the mean, Canadian stocks outperformed those of the S&P 500 almost two-thirds of the time by about 8 percentage points. Much like in the United States, the deployment of Covid-19 vaccines has bolstered Canada’s economic outlook, making sectors like finance, energy and materials attractive.
But investors should also be aware of the Federal Reserve’s potential shocks to Canadian stocks.
BofA strategists added that a previous Fed fiscal tightening could lead to a stronger US dollar and weigh on Canadian stocks. In another scenario, if economic growth were to weaken in one way or another, growth stocks would likely regain favor with investors, making the S&P 500 a better game against Canadian stocks in this case.