All Canadian equity investors are faced with the dilemma of allocating their funds between domestic and U.S. stocks, no matter where they stand on the passive versus active strategy continuum. BofA Securities equity and quantitative strategist Ohsung Kwon has thankfully helped clarify the decision in a research report this week arguing that the TSX will outperform if inflation persists, and the S&P 500 will outperform when disinflationary forces take hold.
The disinflationary sentiment in the final quarter of 2023 led to the S&P 500 outperforming the S&P/TSX Composite by 16 percentage points for the year. Mr. Kwon finds this consistent with historical trends, notably from the 1970s, when the extent of inflation pressures effectively predicted the relative returns of Canadian and U.S. stocks.
The strategist believes that Canadian equities offer a hedge against the two biggest risks for global investors – inflation and geopolitics….
