Stu Morrow
Chief Investment Strategist, Morgan Stanley Wealth Management Canada
July 2023
Compelling Opportunities in Canadian Equities
Canada has had a similar, but delayed, post-COVID recovery compared to
the US, leading it to outperform its neighbour to the south in 2022. Higher
commodity prices also helped support trade and energy capital
expenditures.
Transcript
‘Compelling Opportunities in Canadian Equities’ podcast script
Target recording time: Approx. 3-5 minutes
Welcome to Canadian Insights, where Morgan Stanley Wealth Management offers the Canadian perspective on global macroeconomic events, while as always, adhering to a long-term approach.
I’m your host, Stu Morrow, Chief Investment Strategist for Morgan Stanley Wealth Management Canada.
In this episode I am going to focus on our most recent report titled “Compelling Investment Opportunities in Canadian Equities”.
For more details on our report, please visit our website at www.morganstanley.ca, or reach out to your Morgan Stanley Wealth Management Canada Financial Advisor with any questions.
Alright, let’s talk about the opportunities we see today in Canada.
Canada has had a similar, but delayed, post-COVID recovery compared to the US, leading it to outperform its neighbour to the south in 2022. Higher commodity prices also helped support trade and energy capital expenditures.
In 2023, however, Canada's growth has slowed alongside the US. Canadian households are constrained by lower home prices and higher debt-servicing costs, but personal income from a still-tight labour market has helped to put a floor under spending.
As we look ahead to 2024, we believe that less restrictive monetary policy may stabilize housing activity and support consumption and business investment, pushing growth above potential.
However, the lagged effect from 475 basis points of rate hikes lead us to expect to slower growth later in 2023 and into 2024, with a non-zero probability placed on a recession during the forecast period.
In our report, we explore a few long-term growth opportunities for Canada’s economy and stock market.
These opportunities include investments in infrastructure, energy transition and technology, which may offer domestic opportunities for Canadian investors. All of this, in part, is due to a robust US capital expenditure cycle that we expect in the coming decade, as well as Canadian population growth fueled by net immigration.
From a valuation perspective, Canadian equities have rarely been this inexpensive relative to US equities and relative to their own history.
As of the time of recording, the Canadian equity risk premium (or ERP for short) is more than twice that of the US, using the two countries’ most prominent indices. The equity risk premium measures the additional compensation that investors are priced to receive in corporate earnings vs. a risk-free interest rate. This wide dispersion between Canada and the US has only occurred 6.3% of the time since 2000, presenting a favorable entry point for investors looking to Canada.
It’s important to always consider country allocations from a total portfolio perspective. To that end, Morgan Stanley Wealth Management’s Global Investment Committee (GIC) currently favours greater exposures to developed Asia-Pacific equities, including Japan; emerging market equities; and fixed income and underweight exposures to US equities, particularly the potentially overextended growth style.
The GIC has placed underweight exposures to commodities and real estate/REITs but overweight to hedged strategies, compared to its blended benchmarks.
I’ll conclude this recording by saying that we recognize each investor faces their own unique investment objectives, risk tolerance and capacity for risk, liquidity needs, and unique circumstances, all of which influence your investment asset allocation.
And therefore, there is no substitute for proper risk management principles of diversification by asset classes, region, style, and currency during any point in the economic cycle.
Thank you for listening to the podcast, please visit our website at www.morganstanley.ca for more information about our inflation outlook.
Thank you for listening.
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Index Definitions
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
Risk Considerations
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk, liquidity risk, and credit risk of the issuer.
High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility, and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.
Companies paying dividends can reduce or cut payouts at any time.
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Investing in small- to medium-sized companies entails special risks, such as limited product lines, markets and financial resources, and greater volatility than securities of larger, more established companies.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.
The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment.
The indices selected by Morgan Stanley Wealth Management Canada to measure performance are representative of broad asset classes. Morgan Stanley Wealth Management Canada retains the right to change representative indices at any time.
Disclosures
Morgan Stanley Wealth Management Canada Inc. (“MSWC”) is a wholly owned subsidiary company of Solium Capital ULC which in turn is a wholly owned subsidiary of Morgan Stanley, a publicly traded company listed on the New York Stock Exchange with its global headquarters located in New York City.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
Morgan Stanley Wealth Management Canada Inc, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.
Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.
This material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Wealth Management Canada Inc.
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