The Canadian equity market’s high exposure to the energy sector and low weighting in techs has curbed the market’s performance in recent years — now that sentiment has flipped however, the Canadian market is outperforming its U.S. counterparts, says Morningstar Indexes.
In a new report, the firm noted that the Canadian market is holding up much better than the U.S. in the current sell-off.
“The Morningstar Canada Domestic Index has declined 9.4% year-to-date as of June 16 as compared to a 21.7% decline for the Morningstar U.S. Total Market Exposure Index,” it reported.
This recent outperformance by Canada follows a long period of relative underperformance for the Canadian market versus the U.S.
Over the past 10 years, the Canadian market has lagged the U.S. market by approximately 700 basis points on an average annual basis, it noted.
These trends reflect the divergent composition of the markets, the report said.
In particular, the Canadian market’s overweight in the energy sector, which has been the best performer this year, and its underweight in the tech sector — the worst performer so far this year — has enabled Canadian markets to hold up better under current conditions.
“As a resources-heavy market, Canada is benefitting from surging prices for oil and other commodities,” said Dan Lefkovitz, strategist, Morningstar Indexes, in a release.
However, over the past 10 years, “the exact opposite is true,” the report said — noting that energy has been the weakest sector in that period, while tech has been best.
“Historical perspective is important. U.S. equities have been outperforming Canadian equities for the past several years, but the Canadian market led during the years of the commodities supercycle in the early 2000s. The cycle could be turning once again,” Lefkovitz added.