Why to invest in Canada now?

As Portfolio Managers of Canadian mandates, we are always being asked when is the right time to invest in the Canadian market. The reason this question frequently comes up primarily stems from the fact that the Canadian index is very concentrated with a particular focus on financials (35%), energy (18%), and materials (12%), which combined, make up about two-thirds of our market. With this level of concentration, there is a tendency by investors to try and "time" the market and invest thematically in certain sectors. We take a different perspective, which is that if you are patient, maintain a disciplined process and take a long-term view, you can construct a portfolio of high-quality businesses that are well diversified and generate attractive risk-adjusted returns.

Looking back at the performance of the TSX Composite Index (TSX) relative to the S&P 500 (S&P) over the medium-term, we have seen a significant amount of underperformance in Canada. While the S&P has returned 20% on average annually over the last five years, the TSX has had an average annual return of 7% over the same duration. The dramatic difference in performance primarily stems from a collapse in the energy and material sectors in 2014-2015, combined with a change in the administration in the U.S. to a more pro-business stance since late 2016.

There is no question that there remains a number of concerns in relation to the Canadian market, which include an overheated housing market, ongoing trade disputes with the U.S., and the long-term threat of a movement to alternative energy sources. However, it's arguable that a significant amount, if not all, of these risks are reflected in the Canadian market, especially on a relative basis. For instance, if you look at the U.S. economy, it is firing on all cylinders - and the Canadian economy has never gone into a recession without the U.S. While the U.S. market is more diversified, it is also a lot more expensive at 22x earnings compared to the TSX at 16.5x. Considering all of the bullishness with the U.S. economy and the elevated valuations within that market, we are concerned that expectations of future returns are too lofty, and that the U.S. market is setting itself up for a disappointment rather than a positive surprise.

The reality is, pinpointing when the right time is to invest in Canada is difficult. Taking into consideration what is highlighted above, we would argue that the risk-reward relationship skews in favour of the Canadian market over the U.S. if you are willing to take a 3-5 year view, and especially if you are an active investor. The Canadian market offers investors exposure to some very high quality businesses, which include a financial system that side stepped the 2008 crisis and remains very well capitalized, a group of top notch energy producers with tier 1 assets that have long life reserves and great balance sheets, and finally, a mix of high quality unique businesses that are leaders in their respective industries such as: Winpak, CCL Industries, Chemtrade, Alimentation Couche-Tard, Prairiesky Royalty, Brookfield Asset Management, Toromont, Westshore Terminals, First Service and Saputo, to name a few.

In our view, the current market environment provides an opportunity for investors to take a fresh look at investing in Canada. If you are looking to game the market and make a quick 10% on timing it, then we are probably not the right stewards for your capital. But if you are looking to invest with a 3-5 year outlook, we can provide you with a portfolio of high quality businesses with very well-regarded management teams and diversification that in our view will help you and your clients sleep well at night. While investing in Canada is not always easy, if you are disciplined and active in our opinion there is really never a bad time to look at Canada. That being said, the relative dispersion in performance between Canada and the U.S. over the last five years makes investing in Canada now that much more compelling.

About Don Simpson & Eric Mencke

Don Simpson is the lead manager on a range of funds including Dynamic Value Fund of Canada, Dynamic Value Balanced Fund/Class, Dynamic Dividend Advantage Fund/Class and Dynamic Canadian Dividend Fund. Don Simpson, has more than 20 years of investment management experience, having managed a range of equity and balanced strategies during his career.

Eric Mencke is Co-Portfolio Manager of Dynamic Canadian Dividend Fund, Dynamic Canadian Value Class, Dynamic Advantage Fund/Class, Dynamic Value Balanced Fund/Class and Dynamic Value Fund of Canada. Eric Mencke joined Dynamic Funds in 2016 bringing more than 20 years of investment industry experience.

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Disclaimer:

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds managed by 1832 Asset Management L.P. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.