BofA Expects Canada Stocks to Continue Trouncing Their US Rivals


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(Bloomberg) — Toronto-based equities clobbered those in New York over the past year, and Bank of America Corp. expects that to continue as cash resources of Canadian stocks now outstrip those of US peers.

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The S&P/TSX Composite Index has climbed 6.6% through the first month of the year, out pacing the gains of the S&P 500, which is up 5.2% over the same period. Canada’s key index also beat its American rival by around 11 percentage points in 2022. And BofA Securities strategists Ohsung Kwon and Savita Subramanian are encouraging investors to “stay long Canada over US” despite the prolonged hot streak.

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“Cash is becoming scarce,” the strategists warned, encouraging investors to own stocks that generate and return cash to shareholders in the face of a possible recession. The bank said it’s easier to find those stocks in Canada’s main index than in the S&P 500. 

“The TSX’s free cash flow yield has eclipsed the S&P 500’s for the first time in history since 1998, yielding a record 1.5ppt more,” the strategists wrote in a research note Monday. The dividend yield of stocks in Toronto averages 3%, twice that of the S&P 500, they added.

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BofA’s call is contrary to some other banks on Wall Street and Toronto’s Bay Street where expectations are for the two country’s main indexes to perform similarly. The average expected return in the S&P/TSX Composite is 12%, according to data compiled by Bloomberg, in-line with expected returns from the S&P 500.

Still, BofA is bullish on Canada with the bank’s call partly based on valuation as the strategists say a recession is “more priced into” stocks in Toronto than in the US benchmark. 

The Bank of Canada signaled last week that it may hold interest rates at 4.5% rather than BofA’s expected terminal rate between 5% and 5.25%, “which translates to a lower discount rate for Canadian equities.”


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