The Harbour Group of RBC Dominion Securities

Transcription

1 RBC Dominion Securities The Harbour Group of RBC Dominion Securities Canada Leading G7 For Economic Growth But Not Being Reflected In The TSX

2 Canadian Growth Leading, But The TSX Lags Canadian economic growth has been strong in 2017, leading some to sound the all clear. The strong economic performance is a good sign, and has been reflected in bond yields and the Canadian dollar. The TSX has lagged global markets this year, but this comes after a very strong performance in Despite oil prices that are well off the 2016 lows, the energy sector is holding back TSX performance while stalwarts such as the banks have put up respectable results year to date. Conversely, the S&P 500 s strong performance has been partially masked by the resurgent Canadian dollar. While a stronger loonie is a good thing from a purchasing power perspective, it also dampens returns on foreign securities. We believe there is significant scope for portfolios to add to performance in the back half of 2017 should these trends revert to the mean. 2

3 Canada Leading The Global Growth Parade For the first time in years, economists expect global growth to accelerate across the U.S., Eurozone and Japan, and Canada is leading the G7. Stronger growth is giving central banks the confidence to begin removing accommodation despite weak inflation. 3

4 But This Is Not Reflected In The TSX! The TSX outperformed in 2016 as the Canadian economy was suffering from the oil bust and Alberta wildfires. Now that Canadian economic growth is outperforming, the TSX is actually lagging as markets discounted this outcome in

5 Currency Weighs on Foreign Returns The S&P 500 s outperformance in 2017 has been subdued by the strong performance of the Canadian dollar, but it is still outpacing the TSX. Either a weaker Canadian dollar or mean reversion in the TSX would bode well for portfolio performance in the second half of

6 TSX Cheapest vs. S&P 500 Since 2008 The forward price/earnings ratio for the TSX relative to the S&P 500 is the lowest it has been since 2008, at 1.83x lower than the S&P 500. The TSX typically sees a period of outperformance when the relative valuation gets this stretched, and we would note sentiment toward the TSX is currently quite dismal. TSX Forward P/E S&P 500 Forward P/E 6

7 Don t Count The Energy Sector Out Just Yet Energy stocks have been a disappointment in 2017 but we are loathe to abandon securities trading as cheap as the energy sector currently is, particularly as demand for heavy crude oil could rise sharply if the U.S. bans Venezuelan oil shipments. 7

8 Canadian Dollar Trading With Interest Rates The strength in the Currency can be completely attributed to interest rates, as seen below. 8

9 Oil Prices Less Of A Factor For The Loonie The volatility in the oil price has had no impact on the Canadian dollar, reinforcing the thesis that interest rates are driving nearly all of the strength in the currency. 9

10 A Lot Of Good News Priced Into Canadian Yields and CAD Canada has delivered strong economic growth this year, but we note recent GDP data is from way back in May, at which point we were lapping 2016 s energy and wildfire related weakness. Canadian economic releases have been much stronger than the U.S., but we wonder how much longer this trend can go on for. 10

11 Risks Still Lurk For The Canadian Economy Aside from oil, it is beginning to appear that the spring-time frenzy in the Toronto real estate market may have been a blow off top, the future implications of which are not known. The loonie has also taken a relatively sanguine view toward the NAFTA renegotiation. The Bank of Canada has a history of backtracking on rate moves, and if these risks intensify or the Loonie strengthens further, it is possible that happens yet again. 11

12 In Summary Canada s strong economic performance has been reflected in bond yields and the Canadian dollar. The TSX, on the other hand, has lagged global markets this year, but this comes after a very strong performance in This has left the TSX trading at very attractive valuation levels compared to the S&P 500. A rebound in energy securities would be a big step in the TSX regaining some ground against the S&P 500. For Canadian investors, the S&P 500 s strong performance has been partially masked by the resurgent Canadian dollar, and this could easily reverse itself should the Bank of Canada reconsider the pace of rate increases. 12

13 Disclaimer There are many opportunities and solutions available to assist you in meeting your investment and estate planning goals. However, because of the complexity of integrating your corporate and personal goals, considering the different tax systems, it is essential that you involve the appropriate professionals in order to maximize these opportunities and accomplish your goals in the most taxeffective manner. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. Registered trademarks of Royal Bank of Canada. Used under licence Royal Bank of Canada. All rights reserved. 13