Canadian Equity Value –
A Powerful Combination

The concentration of the Canadian equity market has at times resulted in a small number of securities aggregating to a disproportionate share of the market index. For example, at the end of September 2022, the largest 15 securities represented 47% of the S&P/TSX Index.

The top 15 security list has also witnessed the rise and fall of several companies over the last dozen years including Potash Corp, Blackberry and Valeant, to name a few. The most recent case in point being Shopify, which became the largest company in the index (approaching ~7% in November 2021) before its subsequent material decline to 1.7% of the index at the end of September 2022.

A value style can be contrarian to general market consensus when unreasonable expectations get built into valuations leading to periods of underperformance.   However, when reality reasserts itself and companies like a Shopify correct, adherence to a disciplined value approach can provide valuable protection.

Oh Canada!

In the current economic environment, sell-side research has recognized the attraction of the Canadian equity market. In June 2021, Bank of America research predicted that Canada would perform well relative to other markets amid rising commodity prices. In its latest April 2022 research paper, they believe the tailwind is even stronger now for Canada and remain bullish on the S&P/TSX Index, including a belief that the valuation metrics are attractive, particularly relative to the U.S equity, S&P 500 Index.

The Case for Canadian Equity Value

In the current challenging economic environment, Canada offers exposure to attractive commodity and resource sectors along with competitive valuations compared to other markets globally. A natural hedge to inflation and poised to benefit from global decarbonizing efforts, the Canadian market is uniquely positioned for the current environment.  A relative value style can capture this potential while avoiding the pitfalls that come from the marketplace’s propensity to chase market winners at any price.

[1] Bank of America, A new regime: Buy Canada, 22 April 2022 and Scotiabank, Here’s Why You Want to Buy Canada, March 22, 2021.

1. Unless otherwise stated, all data is as at September 30, 2022 and stated in Canadian dollars (CDN$). Annual performance figures are as at December 31 for each calendar year. Source: Connor, Clark & Lunn Financial Group Ltd., Morningstar Canada and Thomson Reuters Datastream. 2. Performance history for the Scheer Rowlett Canadian Equity Strategy is that of the Scheer Rowlett Canadian Equity Composite. The Composite has a creation and inception date of January 1996. All performance data is gross of fees unless otherwise stated. Gross performance figures are stated after trading expenses and before management fees, performance fees and operating expenses. Operating expenses include items such as custodial fees for segregated accounts and for pooled vehicles would also include charges for valuation, audit, tax and legal expenses. Such additional operating expenses would reduce the actual returns experienced by investors in segregated accounts and pooled vehicles. Past performance of the strategy is no guarantee of the strategy’s performance, future returns are not guaranteed, and a loss of capital may occur. 3. Benchmark for the Scheer Rowlett Canadian Equity Strategy is the S&P/TSX Composite Index. Benchmarks and financial indices are shown for illustrative purposes only, are not available for direct investment, are unmanaged, assume reinvestment of income, do not reflect the impact of any management or incentive fees and have limitations when used for comparison or other purposes because they may have different volatility or other material characteristics (such as number and types of instruments) than the strategy. The strategy’s investments are not restricted to the instruments comprising any one index and do not in all cases correspond to the investments reflected in such indices. 4. Added value figures may differ due to rounding to 1 decimal place.

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