Canadians are frantically educating themselves on how to source locally.
Across the country, consumers whose blood has been set aboil by Donald Trump’s campaign of belligerence have channelled their anger into a wave of patriotic spending.
We have become obsessive label readers in search of Canadian content. Many are asking if they should bring a local bias to their investments as well.
Does it matter that you’re boycotting Kentucky bourbon when your savings are tied to the success of corporate America?
There’s a lot more at stake when it comes to one’s investment portfolio. Its purpose is to provide financial security in retirement, which isn’t something you want to mess with rashly when emotions are running high.
For well over a decade, the U.S. stock market has been a singular dominant force in global financial markets and that could very well go on for years more.
Some regular investors may not have the luxury of distancing themselves from the American juggernaut, as much as they might like to.
Others may be comfortable with retreating from U.S. stocks if it means taking a principled stand with their investment dollars. That’s basically what ESG (environmental, social, and governance) investing is, to use one common example.
ESG funds typically exclude companies like for-profit prisons, Big Tobacco, or fossil fuel producers. Not because they are bad businesses but because some investors don’t want to have a financial or moral stake in them.
The same logic applies here, if you’re mad enough about American hostility toward Canada. And buying local is even easier to do on the stock exchange than at the grocery store.
“We’ve got great businesses here,” said Ryan Crowther, a portfolio manager at ClearBridge Investments, part of Franklin Templeton. “Canadians shouldn’t feel like they’re compromising by investing on their home turf.”
With a revived loyalty to a beleaguered Canada in our hearts, let’s look more closely at what the domestic stock market has to offer, as well as what it lacks.
Oligopolies
The Canadian stock market doesn’t have the greatest reputation. While the Americans are at the forefront of innovation and AI exuberance, the TSX is seen as four oligopolies in a trench coat.
Don’t knock ‘em till you try ‘em. Oligopolies, that is.
It’s true that there is heavy concentration in certain Canadian sectors, including banking, railways, telecoms and grocers. They evolved this way in part to avoid being swallowed by American competition.
Canadian consumers complain about the lack of choice, and rightfully so. But oligopolies are great investments.
A few years ago, Ian de Verteuil, a strategist at CIBC World Markets, showed that all four of these oligopolies generated annual total returns in the double digits over the prior 30 years, easily outpacing the rest of the market.
Banks
Boy, do we have banks. Banks up the wazoo. Throw in the life insurers, and the financial sector alone accounts for nearly one-third of the leading Canadian stock index. That’s about double the global average.
Canada’s banks are some of the most profitable on the planet, with margins that exceed 25 per cent in aggregate. The incredible earnings power of the financial sector is responsible for more than 40 per cent of the total profits generated by all companies in the S&P/TSX Composite Index TXCX-I.
To a decent extent, those profits are sheltered from the tariffs Mr. Trump chronically threatens but has yet to impose on Canada. The exception here is if there is a recession that sparks a surge in bankruptcies, which would see bank profits pinched by loan losses.
Resources
It’s a bit ironic that Canada’s much-maligned and marginalized oil and gas industry is now the country’s biggest economic bargaining chip. There even seems to be support building for pipeline projects that would reduce Canada’s dependence on exports to the U.S.
There is something for investors in the energy sector’s strategic importance in all of this. Is Mr. Trump really going to risk higher gas prices by putting tariffs on Canadian oil? If he’s bluffing, the domestic energy sector is probably a good bet.
Gold, meanwhile, has proven to be an antidote for tariff madness. Investors have piled into gold as a hedge against trade friction and inflation.
Dividends
So beloved is dividend investing in Canada, it may as well be enshrined in the Charter.
The TSX has always had an advantage over the U.S. market in terms of dividends, even more so now that the S&P 500 INX-I dividend yield is close to a record low.
Look to dividend names to hold up well if economic pressures in Canada force additional rate cuts.
Bargains
Have you heard about the big sale at the TSX? Thirty per cent off, exchange-wide!
That’s roughly the discount that the average Canadian stock is trading at relative to the U.S. market – about as large a gap as there has ever been.
If you’re worried about U.S. stocks running out of steam after a historic run, cheap Canadian stocks could help limit the damage.
Weak spots
The TSX doesn’t have a whole lot of tech names outside of Shopify Inc., SHOP-T is weak in consumer stocks outside the grocery chains, and has almost no pharmaceutical presence.
These are all sectors where the U.S. market dominates. But the committed anti-American investor can look to international markets to fill in the gaps, said Brett Girard, chief financial officer of Liberty International Investment Management.
For example, Netherlands-based ASML Holdings ASML-Q is a major player in the computer-chip industry, French multinational LVMH is the world’s largest luxury goods company, and Novo Nordisk NVO-N is the Danish firm behind the Ozempic and Wegovy weight-loss drugs, Mr. Girard said.
“There’s plenty of names outside the U.S., if investors are willing to do a little bit of digging.”