Recent weakness in the Canadian market leads us to recommend Canadian equity funds now. Higher stock valuations in the US have made international equity funds the more attractive choice globally.
The performances of the Canadian and US stock markets have continued to diverge. In the first few weeks of August, the S&P 500 gained about 1.0 per cent, while the S&P/TSX Composite declined by the same amount. The year-to-date results heavily favour the S&P 500, which is up 9.5 per cent. The S&P/TSX, however, is still in the red, with a 2.0-per-cent loss.
This divergence between the performances of the two markets has made Canadian stocks even more attractive on a valuation basis than they were before.
Meanwhile, the outlook for the Canadian economy is generally positive. The country’s real gross domestic product is on track to grow by about three per cent for the year. And while the housing market is currently correcting, the slowdown looks like it will be a soft landing that will not cause the Bank of Canada to back off from its recent hawkish stance on interest rates.
In view of the strength of the Canadian economy and the relatively attractive valuations of our stock market, we think it’s appropriate to add to diversified Canadian equity funds now. As far as US stocks are concerned, however, we’re a little more cautious. Despite the fact that the US economy is also generally in good shape, stock valuations south of the border suggest a more measured pace of US equity fund purchases is warranted.
We also find non-North American markets attractive right now. Recent economic data out of Europe and Japan has been encouraging. And stock valuations in these markets, as well as developing markets, are also attractive compared with the US.
Fund strategies to adopt
If you don’t have any foreign content in your portfolio right now, we think now is an appropriate time do acquire some. We recommend you hold up to 25 per cent of your equities portfolio in non-Canadian stocks to provide adequate international diversification.
We especially recommend non-North American assets at this time, since US markets are relatively expensive. Funds such as GBC International Growth and Mawer International Equity are excellent choices. Both have performed strongly this year, and we expect that will continue, assuming Europe and Japan remain strong.
In Canada, we recommend you build your equity portfolio around core, diversified, conservative Canadian equity funds. We’re talking about funds like Beutel Goodman Canadian Equity, Leith Wheeler Canadian Equity and Mawer Canadian Equity. All three have relatively low management expense ratios.
Contrarian investors with an aggressive bent might want to add exposure to the resource sector, either through funds specialized in that sector, such as RBC Global Resources, or through diversified funds with heavier exposure to resources, like PH&N Canadian Equity.
This is an edited version of an article that was originally published for subscribers in the September 1, 2017, issue of Money Reporter . You can profit from the award-winning advice subscribers receive regularly in Money Reporter. 
Money Reporter , MPL Communications Inc.
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