U.S. economy on solid footing – The U.S. economy is poised to deliver better growth ahead. The base of growth should come from the consumer, as labour market conditions are healthy. Stronger wage growth should emerge amid tighter employment conditions, which combined with improving housing market trends and rising consumer confidence, should support household spending growth.
Valuations still favour overseas markets – Canadian and U.S. stocks still tradeat above-average valuations (above 17 times expected earnings), though we slightly favour the earnings growth outlook for the S&P 500. Overseas markets remain at more compelling valuations, with the P/E ratio of overseas developed-market equities 15% below the S&P 500 and emerging market equities at a 30% discount.
Don’t be deterred by currency impacts – Don’t avoid U.S. investments on the basis that it’s too expensive to purchase them with a cheap loonie. One year ago the CAD was near US$0.76. Since then, the TSX has a total return of 9.2% versus a total return of 12.9% for U.S. stocks after converting back to Canadian dollars (18.6% in U.S. dollars). Global equities have been strong performers, with overseas large-, mid- and small-cap equities and emerging market equities delivering an average Canadian dollar return over the past year that was 2.3 times that of the TSX.
Action for Investors - International equities have delivered strong gains, a trend that can continue. We recommend an increased international equity allocation, as overseas developed-market large-cap equities remain attractive, while better growth in the U.S. would support US small- and mid-cap stocks.
Investing in equities involves risks. The values of your shares will fluctuate and you may lose principal. Special risks are inherent to international and emerging markets investing, including those related to currency fluctuations and foreign political and economic events.