{{r.fundCode}} {{r.fundName}} {{r.series}} {{r.assetClass}}

You are currently viewing the Canadian website. You can change your location here.

Terms and conditions for Canada

Welcome to the new RBC iShares digital experience.

Find all things ETFs here: investment strategies, products, insights and more.

.hero-subtitle{ width: 80%; } .hero-energy-lines { } @media (max-width: 575.98px) { .hero-energy-lines { background-size: 300% auto; } }

About this podcast

Will the Canadian stock market maintain its streak of solid performance in 2022? This episode, Scott Lysakowski, Head of Canadian Equities at Phillips, Hager & North Investment Management, looks back at Canadian markets in 2021, and shares his insight into what investors can expect in the year ahead. [16 minutes, 21 seconds] (Recorded January 7, 2022)

Transcript

Hello, and welcome to The Download. I'm your host, Dave Richardson, and we are joined, early in the new year, by one of our favorites, Scott Lysakowski, Head of Canadian Equities at Phillips Hager & North. Scott, Happy New Year. Great to see you.

Thanks, Dave. Happy New Year to you as well. How are you doing?

I'm fantastic. How are you?

We're good. We're battling some wintry weather conditions here in the West Coast, and we're not used to all the snow in the city. We don't mind having the snow up in the mountains, but snow in the city is not a good set up for us here in Vancouver.

More snow in Vancouver than we've had in Toronto this year. Vancouver Island, as well. Friends on Vancouver Island have been sending me photos of the amount of snow that they're getting. So it's a crazy weather pattern. But it gave you, Scott, a chance, when you were snowed into your house, to dig through volumes of statistics, historical statistics on the performance of the Canadian stock market. And it sets us up for a great discussion on a review of 2021, which was a pretty good year in Canadian markets, both from an overall return, a total return perspective, and not a particularly volatile year. Particularly nice, following the start of the pandemic back in 2020 and the big drop that we had there. Let's take a look back at 2021, the kind of year we had, and then what it pretends for 2022, from a historical perspective?

2021 was a strong year for equity markets across the board, and TSX did well. If you recall, in some of our previous discussions, the TSX was the best performing equity market at one point throughout the year, but just could not keep up to the juggernaut that we saw in the S&P 500. But still strong returns in Canada. Just over 20% returns in price and maybe just under 25%, total return. That's the strongest annual return for the TSX since 2009, since the financial crisis, and within the top 20 of best all time returns. That's a pretty good result for investors in Canada. Another interesting note— and it sort of sets up for our discussion about what does that mean for the year ahead—, we also had the smallest entry year drawdown. We always talk about on average, the TSX goes up 7% a year, but within that sort of 7% return— and as investors probably know, we experience this at some point throughout the year, you get some entry year correction—, and that drawdown on average for the TSX is actually a lot higher than I thought it would be: 15% on average. But in 2021 we didn't have that. The biggest entry year drawdown was about 6%, and that's the third smallest in history. Not only do we have a strong year in 2021 from a total return perspective, we just didn't have that entry year volatility. That was actually quite nice. That sets us up for a couple of things heading into this year; two things. Following a 20+% return, what does the TSX look like? Maybe people are thinking, wow, we had a really big year in 2021, we can't expect to have that. I mean, I don't know if I would expect a plus 20% return in 2022. But typically, the returns aren't that bad; they actually are pretty good and better than average. For the full year, following a 20% return for the TSX, we get on average about 8.1%. That's pretty good. That's slightly better than the long-term historical average of 7.3%. When you think about more of a near-term focus, not that we get too focused on the sort of the quarterly moves, but if you're just thinking about Q1. Q1 is typically about 3.5% of a return, following a 20+% return the previous year, versus the all-time, or the historical average of about 2.5%. You sort of can map out this year of having decent follow through. We've actually had a pretty good start to the year, so far. There are only a handful of trading days in, but a pretty strong start. You could have a strong first quarter or first part of the year and then sort of normalize. On that comment about the low volatility, I mentioned that we only had a 6% entry year drawdown in 2021. The years following these we call low vol years, the entry year drawdown tends to be a little bit bigger, and I think we're looking at sort of in the 18% to 19% range, so above that sort of 15% average that we've seen. I'm not trying to map out exactly how the year is going to go, but following a strong year, we'd expect to see a decent year slightly better than average, and perhaps a stronger start to the year. Within the year, we can expect to see a slightly higher than average drawdown, given that we didn't have one last year. Not exactly sure how that plays out, or exactly what day or month that falls on, but we'd expect to see maybe a little bit more volatility entry year than we saw last year. But I think that should help set things up for what people can expect for the year ahead.

Yes, and not unusual in that. When you have a particularly strong year, the market has become more expensive— although we can maybe talk about that, because last year is a little odd on that front as well—, but as the market gets more expensive, you tend to expect a little bit more volatility. Not surprising that this year is set up more around the expectations of more typical returns with more typical volatility, maybe even a little bit more than normal throughout the year. That's part of investing in stocks and you recognize that now. As an investment manager, you can sort of map that out in your head in terms of the year ahead. But you're much more active than that, and you can shift your view and position very quickly if conditions change throughout the year, right?

Yes. We don't get too wed to a certain outlook. We think in scenarios. And actually, you bring up valuation, which I think is an interesting point to touch on. What was really interesting— and I think we talked about it in a podcast at some point in the year last year—, was just the way that the estimate revision cycle had taken shape in 2021. Obviously, you're coming out of a pandemic and a lockdown and a fairly severe economic pullback in 2020, and you'd expect to see an earnings recovery. We saw quite substantial earnings recovery for the TSX in 2021. The typical seasonal pattern for analyst’s estimate forecast is to start high in January and then go down through a year. 2021 was the exact opposite. They started at a reasonable level, which showed some recovery, and then we just revised higher all the way throughout the year. We had probably one of the biggest estimate positive estimate revision years in history in 2021, and then ending on a fairly strong note. Now, where does the forecast shake out from here? And I guess that's just to that point; you've had the earnings go up and the stock market has been pretty strong, but you haven't really had a lot of multiple expansion that really happened in the latter part of 2020. You have even a bit of multiple compression throughout the year. And then you say, okay, now looking forward, how do things shake out? Analyst forecasts for the TSX are forecasting earnings growth of around 5%, which would be below historic average; it would be significantly lower than the recovery we saw last year. And I still think when you look through it, sector by sector, I still think it's fairly conservative. Big drivers of that earnings growth would still be in the energy sector, and the financial sector. Industrial is actually showing quite strong. And actually, on the financials, I think the estimates are quite conservative. This might be something to talk about on Stu’s days, with Stu, as he’s the expert in the Canadian financial sector there, but there's still some relative conservative numbers coming out of the financial sectors in terms of earnings growth. With the TSX today, it's around 21,000 and you're looking at sort of $1,300 of earnings, trading fairly cheaply on a trailing twelve-month basis. And if you think forward, in that 5% earnings growth, you're looking at 15-times earnings, which is quite a reasonable valuation. Not a lot of excessive scenarios being discounted in that scenario. From a scenario perspective, I think you actually have a decent shot at getting some decent returns, because as we push through this, barring the outcome of this most current wave of Omicron, as we sort of push through that, I think that continuation of reopening of the economy and getting back to economic growth and how that plays out across all sectors, particularly in the financials, you could actually see some upside to that 5% earnings growth in Canada, which would make that 15-times multiple look even more attractive. Stacking all that up, with the historical performance following last year and looking at the way things are shaking out and where the forecasts are, I think it sets up for a decent year, not expecting that 20+% returns like we saw last year, but something you could see in that 8ish% return seems quite reasonable from where we are today.

And then, Scott, when we talk about the U.S.— again, one of the surprising statistics from last year for me was that even though you had over 30% returns in the U.S. last year, you actually had the price earnings multiple on the S&P 500 drop. Because you had so much earnings growth, that 15 number for the multiple on the TSX, where does that sit historically, relative to where the TSX would normally trade?

That would be slightly lower than average. I don't have that number right in front of me, but I'd say that's around average, if not slightly lower. It would be right around the average. So we're not super cheap; we're not super expensive. We would be significantly cheaper than the U.S. We've talked about the market composition differences between Canada and the U.S., and the U.S. has just a much higher exposure to those higher multiple sectors and technology and communications, etc., where Canada has much more exposure to that cyclical type, which is the type of the market we're in. I was reading a research note this morning and we turned the page on the calendar, but the narrative really doesn't change just because the date has changed. We're still in that economic recovery mode. Of course, the Omicron variant has thrown that into question about the exact timing, but to your point, we actually saw multiples compress through last year in both Canada and the U.S. We have to remind ourselves that the stock market is a forward-looking mechanism. Even when we were in the depth of the pandemic and lockdown, the market was looking forward to that earnings recovery and bringing all that forward. Of course, with the vaccine news coming out in late 2020, that happened at a very accelerated pace. We get all that upfront. Then you start to see that earnings growth and the multiple compresses a little bit. It's just something that's more reasonable. And then, of course, if you're thinking, well, we're going to continue to recover at some point, once we move past hopefully the final wave or this more current wave, then I think the market will bring that forward as well, and we could expect hopefully something a little bit more normal in terms of equity returns, which, like I said, sets out very well for Canada.

Yes, again, that's sort of an average multiple on the market, but with the backdrop of interest rates, that although they've had it higher, are still historically low relative to normalized interest rates. It's interesting, as I'm talking to investment managers who are managing in different parts of the economy, and we'll get to Europe and emerging markets in the next couple of weeks, and we'll take a look at fixed income. There is some nervousness around markets, and we've seen a little bit of that early in the year in trading, particularly in the U.S., but after everything that's happened, it's amazing how stable and steady the backdrop has been over the last 12 months and how we're set up for again— there's all reasons to believe that we can continue to have— pretty decent markets, particularly here in Canada.

Yes, I agree. Actually we talked about Canada trading at about average. The one area where it's trading significantly below average is its relative valuation to the U.S. I think I talked about it the last time I was on, a few months ago. We are at a 20-year discount, the steepest discount to the U.S. that we've seen in the last 20 years. It's close to two standard deviation discount. It's almost six whole multiple points. That's actually another tailwind, I think, that's positive for Canada, that relative valuation discount to the U.S. The impact of rising rates and impact on the multiple might be a little bit rougher for the U.S. markets, whereas Canada is already at that average. That's just another tailwind for the Canadian market.

Great. Well, Scott, that was a lot of interesting stuff. You might have to go back and listen to that a couple of times over to capture everything, because there's a lot there. But again, at least it made me feel better about the year we're heading into, and hopefully it did the same for the listeners. Scott, always great to see you. Great to catch up. Good luck shoveling the snow and we'll talk to you next month.

Thanks, Dave.

Disclosure

Recorded: Jan 13, 2022

This report has been provided by RBC Global Asset Management Inc. (RBC GAM Inc.) for informational purposes as of the date noted only and may not be reproduced, distributed or published without the written consent of RBC GAM Inc. Additional information about RBC GAM Inc. may be found at www.rbcgam.com.

This report does not constitute an offer or a solicitation to buy or to sell any security, product or service in any jurisdiction; nor is it intended to provide investment, financial, legal, accounting, tax, or other advice and such information should not be relied or acted upon for providing such advice. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this report. Past performance is no guarantee of future results. It is not possible to invest directly in an unmanaged index.

All opinions constitute our judgment as of the dates indicated, are subject to change without notice and are provided in good faith without legal responsibility. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. RBC GAM reserves the right at any time and without notice to change, amend or cease publication of the information.

Please consult your advisor and read the prospectus or Fund Facts document before investing. There may be commissions, trailing commissions, management fees and expenses associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. RBC Funds, BlueBay Funds and PH&N Funds are offered by RBC Global Asset Management Inc. and distributed through authorized dealers in Canada.

This document may contain forward-looking statements about a fund or general economic factors which are not guarantees of future performance. Forward-looking statements involve inherent risk and uncertainties, so it is possible that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution you not to place undue reliance on these statements as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement.

RBC GAM is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management Inc., RBC Global Asset Management (U.S.) Inc., RBC Global Asset Management (UK) Limited, and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated subsidiaries of RBC.

® / TM Trademark(s) of Royal Bank of Canada. Used under licence.

© RBC Global Asset Management Inc. 2022