Canadian equities leading the way

Jun 04, 2021 | Elinesky Schuett Private Wealth Management


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In our economic update this week, we focus our discussion on the Canadian stock market (which has been one of the best performing year-to-date). In addition to our economic commentary, we’ve included three other links with economic and global insights:

  • Inflation aftershock: The implication for investors
  • Economic webcast, featuring Eric Lascelles
  • Update on third wave, economic developments, geopolitical risks and more

Don’t forget to RSVP for the next event in the Elinesky Schuett Speaker Series: Understanding the importance of Advance Care Planning. Event details and your RSVP link are below. We’ve also included an article on how to begin future care planning conversations to empower older Canadians.

Our blog post this week also includes a statement from RBC on the tragic loss of 215 Indigenous children. This heartbreaking discovery has a national impact, and our hearts go out to the families of those children.

As always, we end our weekly blog post with a few good news stories from in and around our community.


Your economic update

It has been an uneventful few weeks, with volatility near the lows for the year. Government bond yields have remained in a tight range for the past few months, which stands in contrast to the larger swings witnessed earlier in 2021. Inflation concerns have calmed down, for now, but they remain out there, with investors continuing to debate the levels of job growth needed before central banks begin to shift their ultra-accommodative policies. Meanwhile, on the equity front, some markets have continued their slow and steady grind higher. In our economic update this week, we focus our commentary on the Canadian stock market, along with providing a brief update on the global COVID situation.

Coronavirus update

The third wave in Canada remains in decline. The country’s seven-day average rate of new daily infections has fallen by over 50 percent in the past two weeks, and now stands at nearly 2,300. The declines have been across the entire country, and nearly 60 percent of Canada’s population has received a first vaccine dose and provinces have now started to focus on the deployment of second doses.

Variants of the virus continue to be a concern, with the Delta variant, originally found in India, to be the source of particular worry. It now accounts for much of the new daily case load in the United Kingdom. Elsewhere, Asia is back in the spotlight with countries such as China and Vietnam experiencing an uptick in cases. Even Australia has seen a sudden surge, prompting a lockdown in Melbourne.

Canadian equities leading the way

The Canadian equity market has been one of the best performing markets this year. In Canadian dollar terms, the market is up by an even bigger margin than many of its global counterparts, driven by the strength of the loonie relative to most currencies. We’ll save the discussion on the Canadian dollar for another day, and instead focus instead on what has been driving the market and its outlook going forward.

Most of the strength in Canadian equities can be attributed to the cyclical nature of our market. Nearly 60 percent of Canada’s stock market is tied to sectors such as financials, industrials, and non-precious metal commodities, all of whose earnings are heavily influenced by levels of domestic and global economic activity. An accelerating growth outlook acts as a meaningful tailwind, while a decelerating outlook or stagnant one can act as a headwind. Since the second half of 2020, global growth has been on the upswing, fuelling an earnings recovery and higher stock prices, particularly in the cyclical sectors.

The other topic worth mentioning has been the resilience of the Canadian market in the face of higher government bond yields. It has by no means been immune, but it has faced less pressure compared to others. High growth industries such as technology and alternative energy sectors, for example, have been notably vulnerable to the move higher in bond yields this year. This has presented a meaningful challenge to markets like the U.S. and China, which have substantial exposure. While Canada’s technology sector has grown meaningfully in size in recent years, it is still not big enough to present a headwind for the broader market.

Over the past twenty years, Canadian stocks have traded at a discount to their U.S. counterparts. More specifically, on a price-to-projected-earnings basis, Canadian stocks have traded just below their U.S. peers. There have been periods over the past few decades when Canadian equities have traded meaningfully higher – for example, in the commodity boom of the 2000s and in the period immediately following the great financial crisis – but since then, Canadian stocks have seen their premium turn into a discount that reached an extreme late last year. Recently, this has started to reverse, but it still has a long way to go to return to a more normal range.

The backdrop is favourable for Canadian equities, driven by a global economy that should continue to improve in the coming months and a relative valuation that remains reasonable, but it’s impossible to know exactly what will transpire. Moreover, it’s too short-term sighted. After a few years of underperformance relative to global peers, the outperformance of Canadian stocks this year serves as an important reminder to have a well-diversified asset mix that ensures portfolios have exposure to asset classes that can carry the burden of generating returns when other parts of the portfolio inevitably run into some challenges.

Please note that this of our weekly newsletter will be provided bi-weekly unless there is a significant event that impacts the economy or the markets. We will continue to provide other weekly economic content through videos, articles, and podcasts.


 

Inflation aftershock: The implication for investors

Red graph on white paper. U.S. equities are grappling with their first real challenge since the bull market began over a year ago—inflation.

The combination of shutting down and then restarting the world’s largest economy amid waves of stimulus from Washington and the Fed has created unusual distortions, which helped push consumer prices up 4.2 percent in April compared to one year ago, the highest year-over-year level since 2008.

Read the full article online: Inflation aftershock: The implication for investors

 

Monthly economic webcast, with Eric Lascelles

While many are keeping a watchful eye on the recent rise in inflation, RBC Global Asset Management’s Chief Economist, Eric Lascelles, maintains that longer term inflation expectations are still fairly tame, even as we emerge from the slowdown. Also on the economic radar this month: the third wave could be on the retreat for many countries with declining case numbers, eased lockdowns, and accelerated vaccinations. Finally, an assessment of Canada’s housing affordability, and the factors driving productivity growth.

Watch the webcast online: Monthly economic webcast, with Eric Lascelles

 

Business man smiling. Text: RBC Global Asset Management. Monthly economic webcast with Eric Lascelles. RBC logo in bottom right corner.

 

Update on third wave, economic developments, geopolitical risks and more

In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles, shares an economic update as COVID’s third wave retreats. With trade declining during the pandemic, he also provides a forecast on globalization. Finally, he discusses geopolitical risks and how he anticipates markets to be affected.

 

Watch the video online: Update on third wave, economic developments, geopolitical risks and more

RBCText overlay on blue background with a outline drawing of the globe. Text: Global Asset Management: Update on third wave, economic developments, geopolitical risks and more.

Watch time: 13 minutes 37 seconds

 

Understanding the importance of Advance Care Planning

Wednesday, June 16, 2021 – 1:00 p.m. – 2:00 p.m., online via WebEx

Family walking on a path away from a beach area. Please join us on for an informative session to find out what Advance Care Planning is and why it should matter
to you! Click here to RSVP by Monday, June 14, 2021
.

Visit our event page for more information: Understanding the importance of Advance Care Planning

Long-term care your way: Plan now for your future care

Two seniors sitting at a table holding a potted plantTalking about how you want to live in the last chapter of your life is considered taboo in many families. Learn how to begin these family conversations to empower older Canadians in their future.

Read the full article on our website: Long-term care your way: Plan now for your future care

 

Statement on the tragic loss of 215 Indigenous children

Statement from RBC: Our hearts go our to the families and communities of the 215 Indigenous children whose lives were taken at the former Kamloops Indian Residential School on Tk'emlups te Scwepemc First Nation territory, a painful reckoning of our collective history and the need for continuing focus on truth and reconciliation.

 

Community Corner

Each week, we like to end our emails with a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.