The United States stock markets – chiefly the New York Stock Exchange and NASDAQ – are among the best long-term performers in the world. Compounding at about 13% per year on average over the last two decades, they have handily outperformed most other global markets.
Canadian markets are no slouch either, returning about 10% compounded annually (CAGR) over the long run. Still, in recent decades, the U.S. markets have edged us out by a percentage point or two per year.
That doesn’t mean that all TSX sectors have been underperforming the United States, though. To the contrary, many non-tech TSX sectors have actually outperformed their U.S. peers. In this article, I will explore two TSX sectors that have outperformed their U.S. cousins over the last five years.
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Energy
Canada’s energy sector has been doing a bit better than the U.S. energy sector over the last half-decade. The S&P Canadian Energy Index has risen about 240% over the last five years, easily beating the U.S. energy index in the same timeframe.
Take Suncor Energy Inc (TSX:SU), for example. It’s a Canadian energy stock that has risen 183% in price over the last five years, and delivered a 242% total return in the same timeframe. This performance is well ahead of the State Street Energy Sector ETF, which has risen 104% and delivered a 150% total return in the same timeframe.
What has driven Suncor’s excellent performance over the years?
It comes down to a few things.
First, Suncor is a diversified (integrated) oil company, involved in exploration and production (E&P), refining and gas stations. These different verticals respond to commodity prices differently. Crude oil marketing is most profitable when oil prices are high; refining is most profitable when the spread between oil prices and refined product prices is widest. These two conditions don’t always exist simultaneously. So, Suncor can make decent money even when oil prices aren’t through the roof.
Second, Suncor is a fiscally disciplined company. In 2022, when oil prices surged to highs not seen in years, Suncor diligently put the windfall profits to use, paying off billions of dollars worth of debt. The end result was a financially stronger company than existed in 2021. To think, this company was left for dead in 2020 when the COVID-19 pandemic briefly sent oil prices negative!
Banking
Next up, we have banking. Canadian bank stocks as a whole have outperformed their U.S. peers over the last five years. A big part of this is likely the fact that Canadian banks avoided the worst of the Spring 2023 banking crisis, which caused several U.S. regional banks to fail.
Royal Bank of Canada (TSX:RY) is a good example of an outperforming Canadian bank. It has risen 114% in price over the last five years, and delivered a 152% total return in the same period. The overall S&P Canadian banking index has outperformed the U.S. banking index in this period as well.
What has made Royal Bank so successful over the long run?
It comes down to a few things.
First, Royal Bank is fiscally responsible, with a 13.5% common equity tier one (CET1) ratio, which indicates that its liabilities are well funded by high-quality assets.
Second, the bank has a strong brand that Canadians trust.
Third and finally, Royal Bank is operationally diversified, with the ability to thrive in many different market conditions.
The factors above have combined to deliver an investor experience that few U.S. banks can match.
