Compared to global equities' returns at over 12%, Canada's S&P/TSX Composite only returned 4.1% this year
Canada equities have been underperforming in the market this year according to Myles Zyblock, chief investment strategist of Scotia Global Asset Management.
Canada’s S&P/TSX Composite, Canada’s primary benchmark index, ranked 60th in Bloomberg’s 92 “primary indexes.” Compared to other global equities which had delivered over 12% of returns, it only returned 4.1% this year to date.
What caused Canada’s lagging benchmark index performance?
With market capitalization weighted indexes performance often depending on their structure, Canada’s benchmark index performance this year can be attributed to its current sector weights.
60% of the S&P/TSX Composite Index was attributed to financials and resources such as energy and materials. Information Technology, Consumer Discretionary and Communication Services only took up 15%. The former had recently been out of favor with global investors while the latter took the helm of being global equity performance leaders this year.
In order to compete when it comes to returns, Canada needs the S&P 500, which is its US counterpart in the benchmark index, to continue rising as well as have its commodity prices to show more improvements than how it has been recently.
The growth of TSX’s earnings depended on the progress of financial and resource companies’ earnings. In the past 15 years, Canada’s equity market has been underperforming when compared to the US’ because the former’s earnings have not been keeping up with the pace set by the latter.
Zyblock explained that the variation when it comes to the annual returns that TSX has can be explained by the pace of gains in commodity prices annually as well as S&P 500’S rolling one-year returns. He asserted that the best environment for the Canadian equity market is if its commodity prices rally together with its US counterpart.
The state of Canada’s banks and commodity prices
With Canada’s banks having diversified focus over various business lines and geographies, an important part of their business is domestic mortgage lending. While the boom in housing over the last 20 years has contributed largely to its earnings, it is unlikely for it to repeat in the next 20 years.
Zyblock said that China might be an important curb when it comes to future demand in commodity prices, given that it is the world’s largest consumer of commodities. Since it will take time for their real estate overcapacity and capital spending programs to normalize, Zyblock speculated that it may represent an anchor in the pacing of future commodity demand growth.
Zyblock recommended that there should be a much more diversified approach when it comes to long-term investments spanning asset classes, geographies, and sectors.