April 10, 2021 11:52 PM

The Canadian stock market isn’t immunized against growth

The release of Pfizer’s vaccine results delivered a taste of what a post-COVID world might look like. Despite the tech stock sell-off that took place, markets responded favorably overall as renewed interest in value stocks took hold. And with a majority of Canada’s public companies in traditionally value sectors like energy and finance, the shift in stock focus also means a shift in market focus.

/ Published 5 months ago

There is renewed interest in the Canadian stock market following news of vaccine delivering a much needed boost to value stocks
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When the news of successful vaccine trials first broke, it delivered the booster shot that injected much-needed liquidity into languishing the languishing global and Canadian stock markets. Predictably, the results of this real-life ‘clinical trial’ testing for economic reactions showed a strong correlation with what we all suspected. Investors were inoculated with optimism and indexes jumped up multiple percentage points in the blink of an eye.

Initial optimism has since become subdued leaving big upside on vaccine rollout

In the weeks since news of a successful vaccine first dropped, things have been a little more subdued. With COVID-19 fears still keeping a stranglehold on the global population, things have tended towards flat for the most part. And while, at home at least, a continued gentle upwards trend is persisting, investors are just not yet ready to commit to either side of the COVID-coin.

That the TSX has maintained its gentle upwards trend shouldn’t come as a surprise, however. The TSX is light on tech stock weighting (just 9.7%) when compared to the likes of the Nasdaq100 (56.41% technology stock weight). Rather, the Toronto exchange leans heavily towards energy, financial, mining, and other stocks that were less desirable COVID-19.

Fortunately, for the more optimistic amongst us, this leaves a plethora of discount stocks on the table; investor trepidation means many fantastic buying opportunities are wide open. If we allow for the assumption that a vaccine is more a question of when, rather than if, then languishing stocks like Air Canada (TSX: AX) have plenty of room to grow, even if we never quite return to the glory years of the 2010s.

Fund managers are going bullish on Canadian stocks

While the shattered economy that many value stocks must now operate in does mean it will take time before we see a return to the glory days, for many investors a slow and steady path to recovery is beginning to look more attractive. This is especially so as the COVID dream run for stocks like Shopify (TSX: SHOP) has likely reached its exhaustion point—there’s a limit to how many future promises can be made on the back of the online impulse response resulting from distancing and lockdowns.

Naturally—with a profusion of energy, resources, and financial stocks amongst them—this is seeing Canadian stocks become an increasingly alluring attraction for many fund managers. Now, many are also reconsidering into which markets they put their capital.

In speaking of his attraction to Canadian stocks, Patrick Horan, principal and portfolio manager at Agilith Capital Inc. said, “Over the past three years as I’ve seen my Canadian stocks perform really well fundamentally and how their prices were not responsive to the fundamentals… it makes me gravitate more towards them because I know it’s like a coiled spring that’s about to explode.”

Why Canadian stocks

Horan has also noted that the U.S. is likely to remain in the depths of recession for longer than other economies. This, in addition to its discounted value stocks, creates a double incentive for capital that was tied up in chasing the U.S. tech boom to move back into markets like Canada. 

With additional interest, this could make for a strong revival of Canadian capital markets that have so far lagged behind the U.S. markets. For many companies, the fundamentals are there, and the economy is likely to enter into a reflationary cycle in the not too distant future as efforts to recover from COVID’s impact get underway.

Will there be any energy in the Canadian energy sector?

Understandably, as investors are becoming increasingly environmentally conscious, there may be questions over the health of the Canadian energy sector, even in a bullish Canadian market. And it may well be the case that the momentum of traditional oil and gas energy stocks might never build to the levels seen in previous years.

But with a selection of renewables stocks like Algonquin Power & Utilities Corp. (TSX: AQN) available to the Canadian investor, there’s plenty of opportunities to double down on value by jumping into a growth sector within the increasingly attractive Canadian market.

However, it’s also worth remembering that demand will always lag activism. Thus, for investors considering investments into the more traditional energy stocks, this could also be a prime time to snag a bargain on a dividend stock with moderate growth potential. There will, for many years, still be a demand for fossil fuels; the world isn’t going to transition away overnight. And, as commodity demand picks up again and prices rebound, many oil and gas companies will start turning tidy profits once again.

What if things don’t go to plan?

There are always risks, of course. No doubt many challenges lay ahead when it comes to rolling out a vaccine, and immunization of a sufficient number of people will take time. The health crisis isn’t just going to come to a resolution overnight, even if the market’s knee jerk reactions do happen this quickly.

So it’s a matter of playing the waiting game. Inevitably, markets do always go up, so being ahead of the hordes who will undoubtedly deliver another share price boost on the unfolding vaccine news is a wise move to make. When the additional interest in the Canadian market is also added into the mix, now is a ripe time to buy discounted stocks.

(Featured image by Chris Liverani via Unsplash)

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