RBC Dominion Securities The Harbour Group of RBC Dominion Securities May 2017 Conference Call Featuring RBC Capital Markets Chief Canadian Strategist Matt Barasch 10 May, 2017
This is a slow-growing, but long-lasting recovery While the pace has been disappointing, the low growth rate in GDP post-crisis has prevented material excesses from being built up, which typically elicits a central bank response that results in tight money and ultimately, a recession. 2
Chinese Stimulus Suggests A Return To TSX Strength In the post-crisis era, the TSX has shown a positive correlation with the Chinese government s stimulus efforts with an approximately six-month lag. The increased pace of stimulus in the past year bodes well for the TSX as 2017 rolls on. 3
S&P 500 Has Outperformed the TSX Sharply Last Five Years The S&P 500 measured in Canadian dollars has shown solid momentum for the past five years versus the TSX, a trend we expect to continue in 2017. However, history suggests we are in the later innings of U.S. outperformance. 4
TSX P/E Ex-Resources Is Far From Challenging Valuations in Canada are better than meets the eye. The chart below depicts the forward price/earnings ratio of the TSX after stripping out the volatile resources sectors. This exercise reveals a much more sanguine valuation regime that more represents our investible universe. 5
The TSX Looks Undervalued Vs. The S&P 500 Since 2000, the TSX has traded at an average price to cash flow equal to the S&P 500. By that measure, the TSX s relative valuation now sits near previous cyclical lows. 6
Banks Among The Cheapest Higher Yielding Stocks The TSX Banks trade at a large discount to the TSX, but are among the highest quality businesses in the index and pay above average dividend yields that tend to grow. Compared to U.S. stocks of similar yield, the TSX banks trade at half the valuation! 7
Canadian Banks Have Been Strong Compounders Over Time Taking a longer-term view, the Canadian banks have been strong compounders of investors capital going back to the 1980s. In fact, the TSX Banks have even outperformed the mighty Berkshire Hathaway over the last 25 years! 8
Loonie Under $0.80 Is Common May Stay There For A While The strength in the loonie earlier in the year was puzzling given the Bank of Canada s unwillingness to raise interest rates. In recent weeks, that trend has reversed as the Bank of Canada has given no hints of a rate hike and oil prices have softened. RBC s year-end forecast is for the Canadian dollar to trade at US$0.714 9
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