Bank Of America Sees Value In Canadian Equities

Bank of America (NYSE:BAC) is recommending that investors look to Canadian stocks to capitalize on the economic reopening as they represent a cheaper alternative to "frothy" U.S. equities.

Canada’s S&P/TSX Composite Index has plenty of exposure to commodities and cyclical companies, while also trading at its steepest discount to U.S. stocks since the technology bubble more than 20 years ago, according to Bank of America strategists Ohsung Kwon.

The Toronto Stock Exchange currently trades at 17 times forward earnings, a two standard deviation discount to the S&P 500 index in the U.S., Kwon wrote in a note to clients of Bank of America.

"The TSX is much better positioned to benefit from the global economic recovery, which we believe is intact," Kwon wrote, adding that a discount of that size is usually an omen of TSX outperformance.

The TSX’s value-stock bias was tested after a rotation back into technology and high-growth stocks last week, although that move is now starting to cool. The TSX has risen 16% year-to-date, while the S&P 500 has advanced 13%.

Financial stocks, which are 31% of the Toronto Stock Exchange, have been driving the performance, rising nearly 21% this year. Oil & gas equities have also surged as rising demand has pushed crude oil prices to more than $75 U.S. per barrel.