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BofA Securities quantitative strategist Ohsung Kwon provided a delightful bullish case for investing in Canadian assets late last week in. In digging deeper into Mr. Kwon’s analysis, I discovered something interesting: the difference between valuations in domestic and U.S. equities doesn’t really tell us anything about future performance.
Regarding the first point, BofA emphasized that the forward price to earnings ratio of the TSX 60 is 17 per cent lower than the S&P 500, a post-2000 record. Canadian large cap stocks are really, really cheap relative to U.S. stocks. There is no meaningful correlation between valuations and relative returns over one or three years and only a marginal connection between valuations and five year returns. Statistically speaking, the cheapness or expensiveness of the TSX 60 has little or no predictive value for future returns relative to U.S. stocks.
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