Canada’s economy has been trying to recover from its slump of 2015. Because of its resource-heavy stock market and with the Loonie sitting at about 75 cents US, many institutional investors have backed off from the Canadian stock market, looking elsewhere to invest in energy, gold, base metals, and lumber.
Toronto's benchmark S&P/TSX Composite Index declined by roughly 11% in 2015, while, over the same period, the Dow Jones Industrial Average declined by only 2.3% and the NASDAQ was up 7.4%.
Having said all that, investors know that the optimal time to buy is when others are investing elsewhere. That, coupled with the fact that signs indicate that there will be a rebound of the Canadian dollar, may make this the ideal time to invest in the Canadian stock market. And get the jump on other investors.
What Stocks to Choose
The trend with top-down analysis investors is that they are moving away from commodities and from Canada. Commodities have not been performing well. This is unfortunate for Canada's commodity-rich economy. As China refocuses from factory exports to the domestic consumption of goods and services, the global demand for commodities has been hurt.
This struck a blow to the Canadian economy. In turn, Canada’s macro dependence on commodities and resources has hurt numerous strong companies, causing panic. However, sell-offs lower the price of solid companies, providing a good entry point for investors hoping to gain in the next three to five years.
Some examples of non-resource-related stocks to invest in are: Canadian Western Bank, AutoCanada, Home Capital, as well as Edmonton-based firms, such as Stantec.
Canada’s Economy Set to Rise
The strength of the U.S. dollar will largely benefit the Canadian economy. The third quarter of 2015 saw an uptick in the Canadian stock market which means it should now be increasingly correlated with the rising U.S. economy.
Canada reported better than expected GDP growth in August 2015, and, for the eighth year in a row, the World Economic Forum ranked Canada's banks as the world's safest.
Fears over how crashing oil prices will affect Canada’s upstart housing market has contributed to the recent underperformance. Yet, the second half of 2015 saw Canada's economy increasingly outshining expectations. Since oil prices are staying low, it tends to relieve panic over the energy sector.
Stocks in the financial sector and defense are also expected to lead to a rally of the TSX before the year’s end. We should start to look at the Canadian financial sector which is the first to bounce back as investors return to the market.
Another space that could lead to an uptick of the TSX is real estate investment trusts (REITs). The consistent decline in valuations in 2015 along with the fact that they are below historical averages, provides a viable opportunity for investors.
That’s not to say that investors should be overly bullish on Canadian stocks. In the long term, it is expected that the S&P 500 will continue to beat the TSX.
