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Posthaste: It's the economy, stupid — what's really wrong with the laggard TSX Back to video

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You have to wonder why Canadians are investing their money outside the country like never before.

Investment in foreign securities hit $29.4 billion in December — largest net outflow of purchases into foreign stocks and bonds on records going back to 1988.

Foreigners also have less appetite for Canadian equities, dumping a record $48.7-billion worth last year.

The easy explanation for the stampede out of Canada would be performance. Last year the S&P 500 beat the S&P/TSX composite index by nearly 13 percentage points. This year the TSX is up about 5 per cent year over year, a far cry from the near 30 per cent gains in its American counterpart.

“On the technical side, the old truth is that Canadian equity indices often just don’t have much exposure to what is working, and that couldn’t be truer today,” wrote Robert Kavcic, senior economist for the Bank of Montreal, in a note on Friday.

Most of the growth in the S&P 500 has been driven by surges of 30 to 60 per cent in technology, communications services and consumer discretionary. These three sectors make up 50 per cent of the S&P 500, but just 17 per cent of the TSX, he said.

Canada doesn’t have a Nvidia Corp, Microsoft Corp, Amazon.com Inc, Meta Platforms Inc or Apple Inc, the five companies of the so-called Magnificent Seven that alone have racked up almost half of the net 1,200 point increase in the S&P 500 over the past year, he said.

Canada’s market is also more susceptible to the pressures of higher interest rates in sectors like utilities, real estate and telecom services.

But Kavcic argues there are also fundamental forces at play. It’s not just the TSX that is underperforming, it’s Canada’s economy.

While real gross domestic product grew 3.2 per cent in the U.S. over the past year, Canada’s GDP grew by just 1 per cent, he said. The gap between per capita growth was even wider, a “historic” 4.8 per cent.

“Interestingly, serious underperformance of Canadian equities since early 2023 has almost perfectly flagged this relative weakness in the real economy,” he said.

Like the TSX, Canada’s economy is also more rate sensitive than America’s. While Canadians are struggling with higher payments after their five-year mortgage renewed, Americans are still enjoying low rates under their 30-year terms. That’s cutting into consumer spending in Canada which is 1.5 percentage points lower than in the United States, said Kavcic.

Canada’s slowdown is showing up in corporate profits that dropped to 6 per cent of GDP in the past year, while remaining steady in the U.S. Labour costs in Canada are also increasing more than south of the border, squeezing margins.

Then there is our dismal productivity. Over the past five years, productivity in Canada’s business sector has fallen 0.3 per cent, while it has grown 1.7 per cent in the U.S.

On the bright side, Canadian stocks are relatively cheap. Kavcic says the TSX is trading at 14 times forward-year earnings compared with 21 times for the S&P 500, “about as wide a gap as we’ve seen historically (think end of the late-90s tech boom.)”

“That’s good news if you believe that sentiment toward Canada is in the tank, and these factors will eventually correct themselves, allowing valuations to normalize,” said Kavcic. “It’s less good news if it’s just a value trap reflecting weaker fundamentals going forward.”

The bottom line: “Canada’s poor relative equity market performance is both technical and fundamental; but, it’s always darkest before dawn.”

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Cryptocurrencies are on a tear, with US$2.4 billion flowing into funds last week. Year to date inflow to crypto funds of US$7.7 billion has already exceeded the US$5.2 billion “bubble” inflow of 2021, say BofA Global Research strategists led by Michael Hartnett.

That puts crypto inflows on track for a “blowout” record of US$44.7 billion in 2024, according to the BofA chart.

With the United States national debt rising US$1 trillion every 100 days and the U.S. budget deficit for the past four years at 9.3 per cent of GDP it’s “little wonder “debt debasement” trades closing in on all-time highs,” said the strategists.

Examples? Bitcoin is at US$64,917 today and gold is at US$2,092.

• PDAC 2024 enters its second day in Toronto. Billed as the world’s premier mineral exploration and mining convention, the gathering hosted by the Prospectors & Developers Association of Canada attracts 30,000 attendees from more than 130 countries. The conference runs until March 6.
• Some of Canada’s biggest cities are reporting their February home sales this week. Greater Vancouver is expected to release sales numbers today, while the Toronto Regional Real Estate Board is expected on Tuesday.
• Earnings: Osisko Mining Inc, Advantage Energy Ltd

• 5 hot button issues as Canada’s largest mining conference starts
• Canada’s big banks weathering the storm as credit strain mounts
• Are you ready to start climbing the property ladder? This checklist will help you find out

Wealth managers can charge pretty high fees compared to do-it-yourself exchange-traded funds, but they do provide guidance and other value-added services. Chartered investment manager Andrew Dobson says losing that is the trade-off for going it alone, but there is a middle option: robo-advisers. Find out more at FP Investing

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line at aholloway@postmedia.com with your contact info and the general gist of your problem and we’ll try to find some experts to help you out while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers led by Julie Cazzin or one of our columnists can give it a shot.

McLister on Mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. mortgage renewed

Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

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