(Bloomberg) -- Canada’s stock market — where returns have lagged the US for two straight years — might offer investors protection against a downturn in US stocks, a Toronto-based asset manager says.
Relatively low valuations and a lack of market froth make Canada “a good place to hide” if there’s a correction in US tech stocks, said David Picton, chief executive officer of Picton Mahoney Asset Management, which has C$12 billion ($8.3 billion) in assets under management.
It’s a contrarian call even on Toronto’s Bay Street, where traders have been bracing for volatility as the country faces tariff threats from US President-elect Donald Trump. Still, Picton says Canadian indices are an attractive option.
“The market is certainly cheap and as the global economy gets better, Canada tends to have a pretty good beta to emerging economies with less of the geopolitical risk,” Picton said. He is also holding more alternative assets, as he sees problems in both the stock and bond markets.
In a report published Wednesday, Picton Mahoney said there is a growing US equity bubble concentrated in large-cap stocks, including heavyweight tech names, joining other investors who have warned about the sector being overvalued. Oaktree Capital Management’s Howard Marks recently raised concerns about investor exuberance, hype around artificial intelligence and what he sees as an overreliance on a handful of outperforming stocks in the so-called Magnificent Seven.
Tech stocks have become very expensive after two straight years of double-digit gains. The S&P 500 Information Technology index currently trades at about 40 times the earnings of its 69 constituents. Some in that group have price-to-earnings ratios in the triple digits, including Crowdstrike Holdings Inc., which trades at at 551 times its earnings.
“We believe market participants are now in a high stakes game of seeing how high this bubble can blow — and most of the players are long US equities because that’s where the excitement is,” Picton Mahoney’s analysts wrote.
In contrast, Canada’s benchmark S&P/TSX Composite Index trades at 17 times earnings. The most expensive Toronto-listed stocks are gold miners, though a handful of local tech darlings including Shopify Inc. also trade at over 100-times earnings. Still, tech makes up just 3.8% of the Canadian market, compared to 32% in the US.
The biggest risk factor for US stocks, according to Picton, is a rebound in inflation, which may cause the Federal Reserve to raise rates at some point this year when investors are largely positioned for rate cuts.
“That would be a big bubble popper for sure,” he said by phone.
To be sure, Canada’s weakening currency has signaled a souring investor attitude toward Canadian markets, particularly as the loonie slips below the $0.70 mark at a two-decade low. Picton Mahoney’s report also warns that Canada faces a high level of economic uncertainty until the Bank of Canada can deliver more rate cuts and federal government stability is restored following Justin Trudeau’s resignation in an election year.
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