Earlier this month, the Toronto Stock Exchange (TSX) hit its highest level ever, breaching the 30,000 mark. The index hit an all-time high of approximately 30,686 and continues to hover around this level (right around 29,580 at the time of writing).
Of course, some investors may look at the move in the TSX and think there’s more upside ahead. After all, the global economy looks to be okay, and one thing is for certain – we’re going to need more resources moving forward. On that front, the Canadian market deserves a look, given its resource-rich nature.
On the other hand, it’s true that the number of economic red flags and potential headwinds is picking up. Let’s dive into whether this rally in the TSX (a move of more than 80% over the past five years) is sustainable, and if more upside is ahead.
The bull case
One of the most important catalysts for the Canadian market relative to global markets is how the real estate and commodity sectors are performing. Whether we’re talking oil and gas, lumber, steel, fish, or a range of other metals and minerals mined by Canadian companies, there are certain long-term trends that continue to hold for bulls who think the TSX can head higher.
Whether we’re talking about electrification (which will require plenty more battery minerals), the rise of nuclear power (uranium), home building activity (lumber) or simply power for the future (oil and gas), there’s a lot to like about the Canadian market and its current composition.
Additionally, investors gain exposure to some of the most stable and durable financial assets in the world. Seems like a good place to invest, for those looking outside the U.S. for markets with better valuations.
The bear case
Inflation continues to pester global central banks, including the Bank of Canada. Commodity prices have been volatile. And there’s always looming trade issues and other geopolitical items Canadians need to think about, stemming from the U.S. and elsewhere.
I think the potential headwinds that could be ahead may be more centred around the bubble that appears to be building in AI (which the Canadian market is much less exposed to), which could lead to relative outperformance for the Canadian market. But that doesn’t mean that if we do see a recession, commodity prices could come down, hampering earnings for many blue chip Canadian stocks.
So, there’s some risk involved here. But the bottom line takeaway is that the TSX is an excellent market for global investors looking for diversification right now.
