The Canadian economy has struggled to emerge from the country's 2015 downturn. The loonie is currently sitting around 75 U.S. cents, and large institutional investors have stopped investing in Canada's resource-heavy stock market, looking elsewhere for investments in energy, base metals, gold and lumber.
Canada's economic performance in 2015 has caused Toronto's benchmark S&P/TSX Composite Index to decline by roughly 11%. Meanwhile, the Dow Jones Industrial Average is down just 2.3%, the S&P 500 Index is flat and the NASDAQ Composite Index is up 7.4% over the same period.
However, the best time to buy is normally when people are investing elsewhere, and it may be time to invest in the Canadian stock market. Canada is beginning to show signs of a second-half rebound, and it's possible to get in before other investors notice.
Investing in Non-Resource Canadian Stocks
Top-down investors are moving away from commodities and Canada; with Canada's commodity-rich economy, this hurts twice as bad. The poor performance of commodities reflects the slowdown of the Chinese economy as it refocuses itself from factory exports to the domestic consumption of goods and services. This transition has hurt global demand for commodities.
This has led to collateral damage in Canada's economy. There are numerous situations where strong companies are hurt by Canada's macro dependence on commodities and resources, causing people to panic and get out of positions they shouldn't. These sell-offs lower the price of otherwise good companies and provide a good entry point for investors looking to realize capital gains in the next three to five years.
It's important, however, to invest only in non-resource-related stocks. Examples of these types of stock include Edmonton-based firms, such as Stantec, Canadian Western Bank, AutoCanada, and Home Capital, a Toronto-based mortgage lender.
The Canadian Economy Is Poised to Rebound
The overall Canadian economy should see some future growth, benefiting from the strong U.S. dollar. Many believe that the Canadian stock market corrected itself in the third quarter of 2015 and that it should now be increasingly correlated with the rising U.S. economy.
Canada reported better than expected gross domestic product (GDP) growth in August 2015. The World Economic Forum ranked Canada's banks as the world's safest for the eighth year in a row. It's expected that Canada will continue to bottom out through October and bounce back in November and December.
The recent underperformance, expected to end in 2015, has been due to Canada's slumping economy and fears over what crashing oil prices will do to the country's upstart housing market. Short interest in Canadian stocks has been increasing steadily this year and is now at its highest level since the summer of 2014.
Canada's economic indicators are consistently beating expectations in the second half of 2015. Much of the panic over the energy sector has also subsided, with most analysts now seeing oil prices as "low for longer," which is a view that benefits energy companies if oil prices surprise to the upside.
Start looking at the Canadian financial sector, which is the first sector to bounce back when people come back to the market. These quality stocks and stocks in the defense trade are expected to lead to a rally of the TSX prior to the end of the year.
Real estate investment trusts (REITs) is another space that could help lead to a rally of the TSX. Valuations have steadily declined this year and are firmly below historical averages, providing a good entry point.
However, it's still expected that the S&P 500 will continue to beat the TSX in the long term. Investors should not be overly bullish on Canadian stocks.
