Still in Undiscovered Value Territory
S&P/TSX 2021 Year-End Price and EPS Targets: Base Case: 22,000; $1,400
As America goes, so goes Canada; North American equities likely to continue to set the pace
No doubt, US stock market and economic resilience have been overarching global investing themes over the past decade and are likely to remain the case for the foreseeable future, especially as we transition out of the unprecedented events of 2020 and global markets struggle with the believability of the earnings recovery and a return to normalcy.
However, this notion of US resilience and wherewithal has also shown itself within Canadian equities. Indeed, we believe Canada remains well positioned to benefit from both a return to stability and the improving North American economy, given it has one of the strongest cross-border relationships with the US of all global markets.
Yes - Canada as a value play - especially when examining non-resource sectors.
We believe there remains an attractive value proposition within Canadian equities for those investors who would like to increase their US growth exposure.
Therefore, as investors continue to deal with the unprecedented nature of 2020 and challenges that remain for 2021, Canada is likely to march toward a new all-time price high according to our models.
SUMMARY
Bottom line:
Thanks in big part to an earnings recovery that has even outpaced its neighbour to the south, Canadian equities are showing a record valuation divergence against the US. While there is no doubt that the sector weight differences have played a significant role in this divergence and will likely continue to do so, our work suggests there remain significant value opportunities in Canada, especially relative to the US. In fact, Energy remains a deep value sector in Canada especially relative to global energy peers. The Canadian Materials sector is now in discount territory given its heavy weight in gold, which has seen a sharp compression in valuations despite gold prices being relatively stable. Even outside these resource sectors, both Canadian Financials and Consumer Discretionary trade at relative discounts to their US peers despite showing similar growth profiles and having relatively strong US growth exposure. As such, we believe many value opportunities exist within Canadian equities, especially relative to the US, and that investors should continue to look to Canada as an attractive value proposition with significant US growth exposure.
Main Points:
Record Setting Valuation Divergence Presents Opportunities
- Record valuation divergence suggests value opportunities likely exist within Canadian equities, especially relative to the US, and that investors should continue to look to Canada as an attractive value proposition with significant US growth exposure .
Sector Weight Differential Suggest Divergence Likely to Persist
- Weight differentials are near record levels and easily the largest explanatory factor in the recent valuation divergence between Canada and the US, suggesting valuation divergence is likely to persist .
Despite Sector Weight Differences, Value Opportunities Exist in Canada
- While the sectors outside the big three are the correlation play to the US, the traditional big three sectors (Energy, Financials, and Materials) are the key value plays within Canada, especially relative to the neighbour to the south .
Even Outside the Big Three, Canadian Consumer Discretionary Showing Relative Value
- While most of the sectors outside the big three like Industrials, Consumer Staples, Real Estate, and Utilities are trading generally in line with the US , Consumer Discretionary sector stands out as another sector that may offer relative value versus the US.
Implementation Strategies: Canadian Relative Value With US Growth Exposure
Source: BMO Investment Strategy Group
To read the full report, click here. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. For disclosure statements, including the Analyst certification, please refer to page(s) 8-10 of the report.
