Bank of America is striking a bullish tone on the prospects for the S&P/TSX Composite Index, staking an argument Toronto’s benchmark will outperform the S&P 500 over the course of the next decade.
In a note to clients, Bank of America outlined seven reasons it sees Canada as a better investment opportunity in the years ahead.While Canada – and its stock exchange – has a reputation as hewers of wood and drawers of water, the recent drop in crude prices hasn’t hampered the TSX as much as it may have been earlier expected.
“The TSX has much a shorter duration than the S&P 500 , yielding 2x as much in dividends, the biggest ratio in history. The TSX is also now more cash rich than the S&P 500, adjusted for market cap. A higher-for-longer rate environment is a much bigger headwind for long-duration assets like the S&P 500.
“Although earnings revisions have weakened overall, they have weakened more for the S&P 500 than for the TSX. Our three-month ratio of above- vs. below-estimate revisions is now 0.8x for TSX vs. 0.7x for the S&P 500. Moreover, the TSX posted a solid 4.5 per cent beat in 2Q, slightly stronger than the S&P 500's beat of 4.0 per cent.
“Our economists expect the terminal rate at 4.5 per cent in Canada vs. 5.0 per cent in the U.S., with activity remaining more resilient in Canada than in the U.S. A lower discount rate and better economic growth should translate to the TSX outperforming the S&P 500.”While short-term valuations – on a price to earnings basis – are poor predictors of long-term return, Bank of America noted that on a longer-term basis, it has proven to be a good indicator of future returns.
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