A worker on the production line at a factory of Velong Enterprises, a manufacturer of kitchen and grilling equipment in Guangdong, China, on Dec. 27, 2022.GILLES SABRIE/The New York Times News Service
The Chinese economic machine is whirring back to life, but the Canadian stock market is oddly indifferent.
China has been dismantling its framework of harsh COVID-19 restrictions, setting the stage for a revival of the world’s second-largest economy. This prospect has enlivened several major stock markets around the world, most notably in Europe.
The Toronto Stock Exchange, on the other hand, appears to be taking its cues from U.S. stocks, which are still under the pall of a bear market.
While investor sentiment in North America has improved over the past three months, the gains have been modest – roughly 11 per cent, compared with nearly 25 per cent in German and French stocks. Britain’s benchmark index, meanwhile, is on the verge of a setting a record high.
While Europe is also being lifted by a reprieve in its energy crisis, it’s not difficult to imagine the TSX making up some of that lost ground as China rebounds.
“Over the next three to five years, there’s going to be lots of demand for materials and for energy, and if China fully reopens, it definitely supports that thesis,” said Sébastien Mc Mahon, chief strategist at iA Investment Management. “The TSX should have a few good years.”
Some of the best years in Canadian stocks, in fact, have coincided with moments of great Chinese economic progress.
The rise of China to global economic superpower fuelled the commodity boom of the 2000s that showered Canadian resource stocks with riches. In the years between the dot-com crash and the global financial crisis, the S&P/TSX Composite Index gained an average of 16 per cent a year. And it outperformed the S&P 500 index in eight of 10 years that decade.
The U.S. market claimed the following decade. The postcrisis era of cheap money and low growth vaulted Big Tech stocks to the stratosphere. In the 11 years that followed, the TSX bested the U.S. market just once.
Another flip of the script is in the making. A period of elevated commodity prices and higher interest rates make for favourable odds for Canadian stocks.
“For the next decade, we’re going to probably relive something like the 2000s, but with much less verve,” Mr. Mc Mahon said.
This is not a replay of the commodities supercycle. The vast industrialization of the Chinese economy after its acceptance into the World Trade Organization in 2001 resulted in astronomical growth with a profound impact on global resource prices. That feat is not repeatable.
“But it’s still going to be significant,” Mr. Mc Mahon said.
China’s zero-COVID strategy had been subtracting as much as 5 per cent from the country’s GDP, according to Goldman Sachs research. The abrupt reversal of that policy and the resulting reopening will likely be the biggest global economic event of the year.
Rising demand out of China, reinforced by central-bank stimulus, will reverberate through the global commodity complex. While China is modernizing toward a more consumer-based economy, it is still the manufacturing hub of the world. It is responsible for one-fifth of global oil demand, while buying more than half the world’s refined copper, nickel and zinc.
There have been big changes in the makeup of the TSX as well. At the peak of the commodity boom, resource stocks accounted for nearly half of the market’s total value. That weighting has come down substantially, but at a combined 30-per-cent share, materials and energy stocks still have enormous sway in the Canadian market.
Many companies in those sectors have been forced to shift their priorities over several lean years in the commodities space.
There is a new-found focus on conservative capital allocation, profitability and returning cash to shareholders, and not just in the oil patch, said Garey Aitken, chief investment officer at Franklin Bissett Investment Management.
“Not enough is being said about the evolution of corporate Canada,” he said.
Combine that discipline with a relatively strong earnings profile, now supported by China’s reopening, as well as low relative valuations, and Canadian stocks could shine for years to come.
“I wouldn’t be surprised that the next 10 years is as good as any 10-year returns we’ve ever seen out of Canadian equities,” Mr. Aitken said.