CIBC: Canadian pension plans and mutual funds returning to boost TSX

Analyst reports an 'an end to the shift out of Canada'

CIBC: Canadian pension plans and mutual funds returning to boost TSX

Analysts at CIBC Capital Markets have reported a shift for Canadian stocks as domestic pension plans and mutual funds end a 15-year trend of ignoring the Toronto Stock Exchange (TSX), according to an article from Yahoo Finance.

CIBC's Ian de Verteuil pointed out that while Canadian retail investors have consistently shown a preference for investing in Canadian stocks, mutual fund buyers had been diverting their investments towards the United States and international markets in the past decade.

Simultaneously, Canadian pension plans had been favoring private assets.

"While we do not see either trend reversing, we see some indications the majority of the shift has already occurred," de Verteuil said, as quoted in Yahoo Finance. "Though we remain cautious on equities overall, we believe an end to the shift out of Canada should provide some support for the S&P/TSX."

The move signals a significant shift as traditionally large institutional buyers of Canadian stocks, specifically domestic mutual funds and pension plans, reposition themselves in favor of Canadian equities.

According to CIBC, these institutions typically represented approximately half of the total market capitalization of Canadian equities.

However, the composition of Canada's main index, heavily skewed towards banks and fossil fuel energy, led investors to explore US markets with greater exposure to lucrative sectors such as healthcare and technology.

"As such, buying a broad range of US stocks has been beneficial to performance, but the decision by many Canadians to shift investment dollars from Canada to Europe or Japan or to most other markets has been negative," de Verteuil said.

"The long-term reality is that Canadian equities have trounced stocks in most developed markets."

De Verteuil emphasized that Canadian stocks were currently trading below their historical long-term averages and maintained some of the most significant discounts compared to US equities in the past 25 years.

Furthermore, Canadian pension plans had demonstrated a doubled commitment to private equity, private credit, real estate, and infrastructure in 2022, as stock prices declined more rapidly than private asset valuations. However, de Verteuil believed that this trend had largely reached its peak.

"We believe most of the shift to private assets has occurred in Canada," he said.