The Strength Of Canada’s Equity Market In The Midst Of A Changing Global Environment

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The Strength Of Canada’s Equity Market In The Midst Of A Changing Global Environment
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Canada is one of the largest developed economies in the world, boasting a nominal GDP of $1.8 trillion and a diverse base of sophisticated industrial and service sectors. Thanks to its robust economic credentials and effective corporate governance record, the Canadian equity market has been a popular choice for investors and a leading performer over the last decade.

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The strength of the Canadian market has been highlighted by strong market sentiment and impressive performance in key indices. For starters, the TSX Composite, which tracks the performance of about 250 Canadian companies, has been on a tear this year, with a YTD return of 17.26% as of September 15. While it's still lagging slightly behind the S&P 500, the TSX has gained for the last 12 months, with major growth in technology companies, industrials, and the healthcare sector.

The TSX now seems poised to continue its recent upward trend going into the end of the year. Despite the short-term risks, including renewed concerns about the global economic outlook, and the long-run impacts of the COVID-19 pandemic, the TSX is expected to close 2021 with another positive year-end performance.

The remarkable performance of the TSX has been mirrored by the Canadian equity market as a whole, with the MSCI Canada Index gaining 31.70% in the last year, its best performance since 2009.

So, what's behind the recent strength in the Canadian stock market?

Strong Support from Retail Investors

One possible explanation is the sustained uptick in trading activity on discount stock brokers and online investing platforms. In a trend that has been repeated around the world, Canadians have embraced the idea of investing through low-cost brokers and online investing apps. The explosive growth in the DIY investing market has helped popular discount trading platforms like Qtrade and Questrade carve away swathes of market share from the traditional full-service broker industry.

The trend has only been accelerated by the tumultuous events of the last year. Even as global equity markets were buffeted by a series of market-moving shocks — most notably, the pandemic-induced economic slowdown in China and the ongoing deterioration in global supply chains — and a general lack of institutional clarity on the long-term economic outlook, retail investors in Canada were flocking to discount brokers and online investing platforms. With investors eager to capitalize on the temporary economic downswing, the retail market has since played a major role in the broader recovery of the Canadian equity market.

Central Bank Stimulus

Like many other countries, the Bank of Canada has used various forms of monetary stimulus to shelter vulnerable sectors of the economy from the direct and downstream effects of the COVID-19 pandemic.

To absorb the economic slack, the Bank of Canada has maintained a massive quantitative easing (QE) program, using its maturity operations to buy up government debt, corporate debt, and bonds from the open market. Unsurprisingly, these measures have helped shore up confidence in the Canadian economy and its supporting financial markets, with the unprecedented liquidity injection driving increases in capital spending, lending, and corporate cash returns.

The Bank of Canada has pledged to continue these measures until the economy has weathered the pandemic. In response to concerns over excess liquidity, the Canadian central bank has indicated that it will begin to scale back the QE program once the economic and financial impacts of the pandemic have begun to subside.

Disruptive Growth Tends

The Canadian economy has been characterized by rapid growth in the last decade, driven by the increasing adoption of digital technologies and the transformation of its traditional industries.

With the ascent of the digital economy and the rise of disruptive technologies in sectors like artificial intelligence, robotics, and the blockchain, the Canadian economy has benefited from the emergence and consolidation of a host of new industries and sectors.

Far from undermining Canada's traditional engines of growth, these industries have boosted productivity and generated new sources of wealth creation for Canadian companies and investors. Case in point: while the Canadian economy shrank by 5 percent in 2020, the computer design and related services sector grew by 3.5 percent, boosting employment rates and gaining the attention of retail and institutional investors alike.

Today, the Canadian economy continues to be buoyed by a number of significant disruptions, including the piloting of blockchain technology in the banking sector, the rapid growth of fintech companies, and the ongoing transformation of the healthcare industry.

The Bottom Line

Canada's equity market is among the most attractive in the world, and its strong performance is a testament to the strength of its economy and the quality of its corporate governance. While there have been short-term risks stemming from the COVID-19 pandemic, the Canadian equity market remains a safe haven, thanks to its strong growth fundamentals and resilient retail investor outlook.

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