Oh Canada! Growth opportunities at a discount

Over the past two decades, capital has steadily flowed out of Canadian equities as investors and pension plans sought opportunities abroad, a movement accelerated by the 2005 removal of Canada’s 30% foreign content limit for RRSPs and pension plans. While this policy enabled access to global markets, the pendulum may have swung too far. Canada’s market offers diversification benefits and a robust share of global GDP, positioning it as an increasingly attractive investment destination.

Although closely linked economically, Canada and the U.S. present distinct investment opportunities. Over 30% of TSX revenue is generated in the U.S., and many U.S. companies depend on Canadian exports. TSX-listed firms benefit from low tariffs and integrated supply chains, capitalizing on U.S. economic strength. Importantly, Canadian equities currently offer superior risk-adjusted upside, even as trade agreements like the United States-Mexico-Canada (USMCA) face renegotiation. Recent positive net inflows into Canadian equities — the first in a decade — underscore renewed global interest and momentum.

Several factors position Canadian equities for potential outperformance:

Re-valuation opportunity

Canadian equities trade at a notable discount to U.S. peers, despite similar earnings growth and profit margins. This presents a compelling case for valuation normalization, with the S&P/TSX poised to close the gap.

Growth expectations

Consensus forecasts project low double-digit earnings growth for Canadian companies, matching U.S. expectations. Balanced sector diversification and the rise of global champions like Shopify and Brookfield reinforce Canada’s growth trajectory.

Gold exposure

The TSX’s materials sector, led by gold equities, has delivered exceptional performance. Central bank gold buying and trade surpluses position gold as a major differentiator and benefit for Canadian equity holders.

Energy leadership

Canada’s energy sector, including oil, gas, and uranium, offers long reserve lives and low marginal costs. With rising global electricity demand and AI-driven energy needs, Canadian producers are strategically positioned for sustained growth.

Looking ahead to 2026, Canadian equities offer compelling opportunities through attractive valuations, strong growth prospects, robust yields, and strategic commodity exposure. Recent shifts in global asset flows suggest this trend is gaining traction, presenting a timely opportunity for investors to capitalize on Canada’s unique strengths.