Canadian mid-caps edge out US peers year-to-date in local currency

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This morning we are doing a brief review of the major themes that we started out 2015 with in both Canada and the US. Our next market commentaries for INK subscribers will be on January 4, 2016 for Canada and January 6, 2016 for the US market when we take a look at what insiders are signalling for the New Year. We will, however, continue to update subscriber report pages in the meantime with changes in our indicators.

We started off 2015 noting that insiders in Canada were upbeat with respect to valuations offering the prospect of both a decent year for stocks and outperformance over the US. In contrast, we noted insiders in the US remained downbeat on valuations suggesting a patient approach to American equities was in order. While insiders were suggesting that valuations in the US Energy sector were improving, we warned that the potential for future losses could not be ruled out. Unfortunately, for investors in the sector, that turned out to be the case.

Clearly, it was not a sunny year for Canadian stocks in 2015. However, developments in the Canadian market were not nearly as horrible as the headline benchmark would suggest. While the S&P/TSX Composite Index has dropped 10.99% year-to-date compared to the S&P 500 Index off 2.59%, Canadian mid-cap stocks as measured by the INK Canadian Insider (CIN) Index have not had it as bad, falling 4.59% (all returns are on a local currency price basis).

In fact, the INK CIN Index has outperformed the SPDR S&P MidCap 400 ETF (MDY*US) which is off 5.39% so far this year. While the two were neck-and-neck in performance for most of the year, Canada's outperformance re-emerged last week around the Fed's interest rate decision. Since Wednesday, the INK CIN Index has outperformed the US mid-cap ETF by about 3.5%.

 

 

Indeed, the long-awaited changing of the guard which we wrote about last spring may finally be taking shape. With the Fed tightening, and the Bank of Canada on hold, if not ready to cut again, liquidity is showing signs of moving into the Canadian market's direction. The INK CIN Index has now even pulled ahead year-to-date against equally weighted large cap stocks in the US as measured by the Guggenheim S&P 500 Equal Weight ETF (RSP*US) which is off 6.55%.

We will take a closer look at what insiders are saying about relative attractiveness of the two markets in January. In the meantime, one key question that investors will have to ask is how much lower can the Canadian dollar go when considering Canada versus US allocations? Its move this far down has surprised us given the election of a new government that is poised to stimulate the economy through both net tax cuts and infrastructure spending. At this point, it seems most investors are fixated on the relationship between the loonie and oil.

But not all. Some are saying "thank you very much" and bringing their loonies back home. Notably, last week, Riocan REIT (INK Edge outlook: mixed; REI.UN) announced the sale of its US retail assets for $2.7 billion. The money will be used to focus on its Canadian operations and balance sheet. The REIT's CEO Edward Sonshine told BNN that the loonie's drop was a "happy accident" for them.

A version of this report also appeared on INKResearch.com for INK Research Company Insider Alert subscribers on December 21, 2015.

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