Canadian stocks or American stocks?
There’s lots of talk these days about how poorly the Canadian markets are performing versus their American cousins, but investors should look again, says portfolio manager Chris Blumas, who argues that it’s the high-octane tech stocks in the States that are accounting for the lion’s share of the gains.
The S&P 500 Index in the United States is finishing off the month of October with a bang as US stocks chart higher in anticipation of another rate cut announcement from the US Federal Reserve this Wednesday. That’s when the Fed’s Open Market Committee will finish its discussion on rates and, according to many, is likely to drop its rate 25 basis points, making it a full 75-point drop over the past three months.
US stocks have responded in kind, with the S&P 500 now up 2.3 per cent over the month of October. Those gains stand in contrast to the situation up in Canada, where troubles in the energy sector have pulled the market lower. The S&P/TSX Composite Index now sits down 1.4 per cent for the month.
It’s anything but a short-term trend, either. Over the past ten years, the S&P 500 has posted a return of 238 per cent compared to the S&P/TSX Composite’s return of 92 per cent.
The Canadian lag has pushed many investors into reaching across the boarder to buy American names like Amazon (Amazon Stock Quote, Chart, News NASDAQ:AMZN) and Microsoft (Microsoft Stock Quote, Chart, News NASDAQ:MSFT) —and they wouldn’t be criticized for doing so, says Blumas, since US tech has been leading the way in the US markets.
“I think that the biggest thing driving valuations is that some of the larger companies in the US have posted tremendous growth. If you look at the composition of the market in the US, technology has a huge influence,” said Blumas, portfolio manager at GlobeInvest Capital Management, to BNN Bloomberg on Monday.
Blumas says October’s poor performance in Canada comes down to election worries and lack of visibility in the energy sector.
“Part of what has been a big influence in Canada has been energy. The medium term outlook for energy is not that strong, so the Canadian markets came off a little bit,” he says. “I think that in the US what you’re really seeing is the [US Federal Reserve] poised to cut again on Thursday and and that’s driving a lot of the sentiment and giving people confidence. People are willing to take more risks in this market and that’s just where we’re at.”
But Blumas argues that investors should be thinking about Canadian equities, which can give better value than their American counterparts.
“[Canada’s] is a great market for people looking for income and if you look at the valuations of the large components like the banks, the energy companies, some of the infrastructure and utility names, the valuations are fairly low there. And in the US you look at some of the bigger companies that are trading at a lot higher multiples like Microsoft with a P/E above 25 or Amazon’s big multiple, and they’re driving the index higher,” Blumas says.