Foyston, Gordon & Payne’s Bryan Pilsworth argues Canada offers a needed offset to US tech-heavy portfolios
Canadian equities have lived in the shadow of their American counterparts for years.
Notably, the gravitational pull of mega-cap US tech stocks, the allure of the "Magnificent 7", and the sheer dominance of the S&P 500 have drawn institutional capital southward and globally, at the expense of the domestic market.
But Bryan Pilsworth, CEO and president and portfolio manager at Foyston, Gordon & Payne, argues that’s shifting. And the shift favours Canada.
“It's important that everyone considers global equities but that has been a very strong trend for quite some time. I think that's issue number one. Issue number two is that sometimes in Canada, we don't realize how good we have it in terms of the companies that we have. We have world class leading companies here in Canada. The market hasn't always appreciated that. I'm not exactly sure why, but I think things are changing now.”
The past decade reinforced that bias, as free trade, falling interest rates, cheap commodities, and the rise of US mega-cap tech rewarded a playbook that largely bypassed Canada.
But that playbook, he argues, is expiring as the world moves toward regionalization, trade barriers, higher borrowing costs, and constrained commodity supply - all conditions that play to Canada's strengths as a resource-rich economy with a new government also focused on attracting capital and generating returns on investment, noted Pilsworth.
"We're in a very different world now. And this different world is going to favour Canada," he said.
Despite Canada accounting for just under four per cent of the MSCI World Index, a weight Pilsworth considers trivial given the country's investment potential, he sees that gap narrowing as global investors start to recognize what domestic markets offer.
"There's a gap for a bunch of historical reasons, not the least of which euphoria with tech companies in the United States," he said.
According to Pilsworth, the clearest gap between investor perception and underlying value in Canada is in energy, especially among producers. He believes the sector is often viewed through the lens of pipeline companies, while the more interesting opportunity lies with producers, which Canadian institutional managers have historically underweighted.
He believes those companies now stand out because they are well run, hold long-life reserves, are strengthening balance sheets, returning cash to shareholders, and still trade at attractive valuations.
To that end, he sees energy as serving a dual role in a portfolio: it can drive earnings growth in normal conditions, while also acting as a hedge if geopolitical instability or supply shortages push prices higher.
He also presents Canada as unusually well positioned because of its self-sufficiency. As a net energy exporter with strong agricultural capacity, the country is less vulnerable than many others to external shocks, which he believes should help contain inflation and support returns.
He extends that argument to other parts of the Canadian market he believes have been overlooked. Financials, particularly banks and insurers, have also been under-owned despite strong records of earnings growth, dividend growth, and shareholder returns.
He makes a similar point about gold, noting that international investors often show more interest in Canadian gold equities than domestic managers do. More broadly, he argues that several Canadian companies compare well with US peers on quality while trading at lower valuations.
“CN Rail is one of the very best rail companies in the world and within it’s North American peers, it's the least expensive right now and it's a world class company,” he noted.
The valuation gap between Canada and the US is real at the index level, with the TSX still trading at a discount to the S&P 500, but Pilsworth underscores that the picture is more complicated once you look sector by sector.
Some Canadian companies, like CN Rail, appear cheaper than comparable US names, while Canadian banks are trading at richer valuations than usual, even if he believes their profitability justifies that to some extent.
He also notes that valuation differences vary widely across industries. In technology, many US companies trade at very elevated levels compared with Canadian peers, though he acknowledges that some Canadian tech names are expensive too.
Whereas, he sees a sharper contrast in retail, where large US chains command far higher multiples than Canadian retailers. To that end, he argues that investors need to assess each company on its own merits, but the broader takeaway is that Canadian equities still look less expensive than their US counterparts.
Pilsworth argues that global investors who track the MSCI are, in practice, making an increasingly concentrated bet on the US and, more specifically, on large-cap technology. He notes that the index has become heavily dominated by a small group of major US companies, with the US share of the benchmark rising sharply over time. He believes that concentration matters because what drove returns over the past decade may not be what drives them in the next one.
He suggests the next phase of the market could favour profitable businesses tied to physical assets and commodities, especially if inflation proves more persistent than many expect.
That’s where he sees Canada standing out. Because the Canadian market has far more exposure to cyclical sectors like energy, materials, and financials than the MSCI does, he believes it offers a useful counterweight to a global portfolio among pension funds dominated by US technology.
“There's this view that you absolutely need to invest very broadly and globally to generate investment returns that are necessary for a pension plan or endowment fund. And there's this myth that there's not enough companies to invest in Canada. On the contrary, we actually have a bunch of very high-quality companies that are what we would call compounders. They compound over time so you can own a basket of Canadian companies with some global, but you don't need to be outside of Canada. You can have good Canadian exposure, and you can generate the necessary returns to meet the obligations of your pensioners or your own retirement or an endowment. You can do very, very well investing in Canada,” said Pilsworth.
“It's going to grow at the same pace that it did in the past. Things change. So we think that Canada is a good addition to a global portfolio and we're recommending to our clients to maintain a Canadian exposure. It's very important,” he added.
