Canadian stocks are due for a boost as domestic pension plans and mutual funds halt a 15-year shift away from the Toronto Stock Exchange, say analysts at CIBC Capital Markets.
Unlike Canadian retail investors with a demonstrated preference for buying Canadian, CIBC's Ian de Verteuil says mutual fund buyers have meaningfully shifted their holdings from Canada to the United States and international markets in recent years. At the same time, he says Canada's pension plans bought more private assets.
"While we do not see either trend reversing, we see some indications the majority of the shift has already occurred," de Verteuil wrote in a note to clients published Monday. "Though we remain cautious on equities overall, we believe an end to the shift out of Canada should provide some support for the S&P/TSX."
Domestic mutual funds and pension plans have traditionally been big buyers of Canadian stocks. According to CIBC, these institutions typically represent about half of the total market capitalization of most Canadian equities.
However, with Canada's main index heavily skewed towards banks and fossil fuel energy, U.S. markets have drawn attention for their exposure to popular themes like healthcare and technology.
The long-term reality is that Canadian equities have trounced stocks in most developed markets.Ian de Verteuil, CIBC Capital Markets
"As such, buying a broad range of U.S. stocks has been beneficial to performance, but the decision by many Canadians to shift investment dollars from Canada to Europe or Japan or to most other (non-U.S.) markets has been negative," de Verteuil wrote. "The long-term reality is that Canadian equities have trounced stocks in most developed markets."
de Verteuil says Canadian stocks are currently trading below their historic long-term average, and remain at some of the steepest discounts to U.S. equities in the past quarter-century.
He adds that 2022 saw Canadian pension plans twice as committed to private equity, private credit, real estate, and infrastructure as peers in other developed markets, as stock prices fell more quickly than private asset valuations last year. However, he predicts this trend has mainly run its course.
"We believe most of the shift to private assets has occurred in Canada," de Verteuil wrote.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.