Can Canadian stocks continue to run?

Jessy Bains
Updated
A sign board displaying Toronto Stock Exchange (TSX) stock information is seen in Toronto June 23, 2014. Canada's main stock index was little changed on Monday as weakness in financial and energy shares offset gains in the materials sector. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)
A sign board displaying Toronto Stock Exchange, June 23, 2014. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)

After lagging U.S. stocks for years, the TSX (^GSPTSE) made up some serious ground so far this year.

Canada’s main stock index hit a record high this month and is up around 18 per cent year to date. Tech (+51 per cent), utilities (+31 per cent), and industrials (+24 per cent) are the top-performing sectors.

But where things go from here is anyone’s guess.

Greg Taylor, CIO at Purpose Investments, says stocks fell too far late last year over recession fears.

“Canada is traditionally thought of as a market that does better late in the economic cycle and this seems to be holding true once again. It comes down to sector weighting,” he told Yahoo Finance Canada.

“Globally, we have seen the start of a rotation from growth to value. The cyclical sectors [financials, industrials, materials and energy] which Canada is overexposed to will benefit in this scenario.”

Still a laggard

Despite the recent run, the TSX still lags U.S. benchmarks over the long and short term.

The S&P 500 is up more than the TSX so far this year
The S&P 500 is up more than the TSX so far this year (Yahoo Finance Canada)

“While this is proving to be one of the best years participants have had in years, it is helpful to keep in mind that the S&P TSX is not that far above its highs set before the 2008 financial crisis collapse, and it’s been a significant underperformer to the S&P 500 (^GSPC),”​ Martin Pelletier, managing director at TriVest Wealth Counsel, told Yahoo Finance Canada.

“This is because Canada is lacking those high-growth segments of the market such as technology, and still has a heavy weighting to resources.”

While tech has been the strongest performing sector, the S&P/TSX Info Tech Index is made up of only 15 companies and represents 5 per cent of the TSX.

The energy sector is 16 per cent of the S&P/TSX Energy Index and contains 20 companies. Pelletier says if the sector doesn’t stage a comeback, the TSX will continue to underperform.

Stick to the plan

Dan Bortolotti is associate portfolio manager at PWL Capital. He also runs the wildly popular Canadian Couch Potato blog, which targets investors who want to learn more about passive index investing. The strategy for long-term investors is to stick to a plan to hold a target mixture of Canadian, U.S., and international stocks and rebalance when necessary. There is no attempt to pick winners, time the market, or bet on individual stocks.

“Over the last 50 years or so, the returns on U.S., Canadian and international stocks have been fairly similar at between 9 per cent and 11 per cent, but they haven't moved in tandem. Investors with short memories may not remember the first decade of the 2000s, when Canadian stocks significantly outperformed the U.S., for example,” Bortolotti told Yahoo Finance Canada.

“Every asset class has its day in the sun and its day in the doghouse. It's always tempting to identify the winners ahead of time, but it's impossible to do that consistently, and usually it just means we end up chasing whatever has done well recently.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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