As President Donald Trump’s trade war continues, Canadian equities are poised to outperform their US counterparts, portfolio managers argue.
“If you look out over a decade, I think you can see the opportunity setting up to favor Canada,” said Brian Madden, chief investment officer with First Avenue Investment Counsel Inc. in Toronto.
In Canada, borrowing is cheaper, stocks are valued at around a 25% discount to the S&P 500 Index, and the nation’s currency is trading below its long-term average. That makes the country ripe for domestic and foreign investment — and by extension equity outperformance, Madden said.
Investors are noticing. For the first time since 2016, the S&P/TSX Composite Index outperformed the S&P 500 for three straight quarters, despite Canada’s economy being threatened with US levies through much of that time. And flows into Canada-focused equity ETFs hit a four-year high in the week after Trump’s April 2 tariff spree, with a net C$2.5 billion ($1.8 billion) added to the pile.
The country goes to the polls next week, but portfolio managers don’t expect political volatility on par with what’s happened in the US. Liberal Prime Minister Mark Carney and Conservative Leader Pierre Poilievre are both running on pro-business platforms that involve cutting taxes, developing natural resources and boosting internal trade.
“We do have tax policy looking like it’s getting better regardless of who wins,” said David Picton, president and chief executive officer of Toronto-based Picton Mahoney Asset Management. Canada has gotten a “sudden wake-up call that our falling productivity is no longer tolerable,” which is leading to proposals aimed at strengthening the economy, he said.
Policy aside, the Canadian stock market is already defensive, characterized by its high dividends and large proportion of safe-haven stocks. Financials, consumer staples and utilities stocks make up 40% of the S&P/TSX Composite, while the S&P 500’s defensive categories — swapping financials for health care — are half as prominent.
But Canadian stocks haven’t dodged the tariff fallout. Though Canada was spared additional pain on April 2, its main equity benchmark entered correction territory shortly after. On Tuesday, the S&P/TSX Composite closed down 5.8% from its all-time high on Jan. 30, while the S&P 500 fell by 13% and the Nasdaq 100 by 15% over the same period.
Canada also faces levies on autos, steel, aluminum and products that don’t comply with the US-Mexico-Canada Agreement. And economists surveyed by Bloomberg see nearly one in two odds that the country enters recession in the next year, higher than the 30% likelihood for the US.
Still, the bets on Canada are for the long term.
Philip Petursson, chief investment strategist at IG Wealth Management, likened the present moment to the post-dot-com market, in which Canadian stocks outperformed the US market for the better part of a decade. “Part of that was valuation driven; part of that was the commodity boom cycle that we could be seeing re-emerge now,” the Toronto-based strategist said.
“This is an opportunity for Canada to show the world that we are perhaps a more stable jurisdiction to operate in that has a skilled labor force, that has a government willing to work alongside,” and a favorable tax regime, Petursson said.
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