According to a recent National Bank Financial ETF Strategy report, Canadian equity ETFs experienced more than $1.5 billion of outflows in 2015. This trend is expected to continue over the remainder of the year, especially as U.S. equities rebound back to new highs. It’s hard to blame investors for exiting Canada given all the uncertainty facing its economy, but things are about to change and here are five reasons investors should look to stay at home.
1. Potential fiscal stimulus
Canadians are worried about the economy and desire additional fiscal stimulus, which generally boosts equity markets in the process.
2. Impact of a falling loonie
The Canadian dollar has dropped in value by 27.5 per cent from its 2011 high and hit its lowest level since 2004 when measured against the U.S. dollar.
Since most of this drop has occurred since July 2014, the impact hasn’t yet shown up in our economic numbers. It soon will. That should provide a boost to corporate earnings and trade flow.
3. Long bear commodity cycle nearing its end
After slowly working through a massive surplus of inventory caused by seven years of overcapitalization at the start of the millennium, there are signs that we are approaching the bottom of the ongoing bear commodity cycle.
There has been a lot of deal flow lately in the Canadian oil and gas sector — including a hostile offer, plenty of asset sales and a couple of friendly deals — which is a positive sign that the sector is getting cleaned up.
4. Strong housing market
The Canadian housing market continues to defy gravity, surprising all of those trying to bet against it., keeping consumers feeling confident.
5. Attractive valuation
Finally, from a valuation standpoint, the S&P/TSX composite is trading at a full 10-per-cent discount at 14.8 times forward earnings compared to the S&P 500 at 16.5 times.
There is room for this multiple discount to narrow once investors get comfortable with the forward outlook from corporate earnings, which are about to show the benefits of the falling Canadian dollar.