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Canadian equities have enjoyed a stellar rally this year with strong global investor interest lifting the market to a new high in November —, which was only recently interrupted by an Omicron-induced pullback.
Jefferies LLC’s latest global ETF report shows that investors have injected US$18.7 billion into the Canadian market through exchange-traded funds year-to-date — fifth highest inflow in the world.
The U.S. led the ETF equity inflow this year, attracting US$594.4 billion, followed by Japan (U$53.8 billion), China (US$46.2 billion) and the U.K. (US$22.6 billion), according to the Wall Street bank’s data.
Riding the investor wave, the S&P/TSX Composite Index has climbed nearly 19 per cent year-to-date, and is on course for its best year since 2009.
But Brian Belski, BMO Capital Markets’ chief investment strategist, believes Canadian investors remain “skeptical and far too pessimistic” about the prospects of the market going forward.
“Yes, not even two years into the recovery and many investors we talk with are already obsessed with diagnosing the end of the cycle, let alone suggesting we are in the late stages,” the BMO analyst wrote in a report late last week. “In other words, ‘Canadian Eeyore’ is on full display as we head into 2022.”
Canadian investors are concerned about inflation, believe the growth cycle is at an advanced stage and question the durability of the commodity markets.
But Belski feels investors are ignoring the “the steepest discount versus the U.S. on record,” with eight out of 11 sectors trading at levels cheaper than their American counterparts. This is especially important as the Canadian market is strongly correlated to the U.S. indices.
“From our perspective, this spells opportunity. Canadian equities remain a strong relative value play within global markets, with 2022 likely positioned to see expanded reopening of the economy that should result in another year of record earnings and one of the strongest dividend growth cycles in decade.”
While the BMO analyst is lukewarm on the energy sector, he believes Canada’s communications sector could surprise on the upside after years of disappointment, labelling it as his “contrarian call.”
“Despite this underperformance, the sector has seen a recent uptick in revision trends after an extended period of downward revisions, which in our opinion could indicate an inflection point on sentiment,” Belski noted.
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