David Rosenberg says investors should favour TSX over S&P 500

David Rosenberg says he sees more upside in Canadian stocks compared to U.S. equities.

Rosenberg, the founder and president of Rosenberg Research, said in an interview with BNN Bloomberg Tuesday that he encourages U.S. investors to “leave New York and come to Toronto.” While the S&P/TSX Composite and S&P 500 Index have both rallied this year, he said Canadian stocks offer better dividends and have more downside protection.

“Central banks around the world are cutting interest rates at various speeds, but yield is becoming scarce once again. So, you want to own yield. The dividend yield on the S&P 500 is 1.3 per cent… it’s almost at a record low,” Rosenberg said.

“In Canada, it’s more like 3.3 per cent. So, you pick up 200 basis points over the S&P 500 on the TSX just by virtue of what the dividend yield is going to be providing you.”

He added that higher valuations in U.S. stocks also factor into him favouring Canadian equities.

“We are in a world where there is an excess of valuations across a lot of risk assets. And the United States is the poster child for that. I cannot believe that we have a situation in the United States where the stock market’s up 41 per cent over the past year and earnings are up four per cent,” he said.

If the S&P 500’s rally was driven only by earnings, Rosenberg said the index would be closer to 4,600 instead of “on its way to 6,000.”

“It’s been multiple driven, and the multiple reflects exuberance and enthusiasm and excitement over the future,” he said.

According to Rosenberg, U.S. stocks are trading with a multiple around 22 while the TSX is trading with multiple around 16.5.

“We’re trading (at) like… call it a 35 per cent discount to the U.S. And historically, because of the composition of the Canadian market relative to the U.S., because the U.S. S&P is growth (focused), we’re more value,” he said.

“We usually trade at a 10 per cent discount. So, like a 30-35 per cent discount is beyond the pale. So, you have yield attributes in the TSX and you have valuation attributes in Canada relative to the U.S.”

Bear market?

Canadian stocks, Rosenberg said, also offer more downside protection in the case of a bear market based on their lower valuations.

Going forward, he added that he doesn’t think the S&P 500 rally can be sustained.

He said that since the stock market is a long duration asset, the S&P 500 at its current level is “telling you it’s expecting EPS (earnings per share) growth for the next five years to average 17 per cent per year, which is more than double the historical norm.”

“The last time we had that five-year earnings growth estimate embedded in the S&P 500, guess when that was? 1999,” he said.