Article: This $100 Billion Fund Manager Says Canadian Stocks Are About to Bounce.
The argument is that because the TSX has underperformed the S&P 500, there will be a regression to the mean that will have the TSX align to the S&P 500 (or vice versa).
This article implies that over-weighting the TSX and under-weighting the S&P 500 would outperform an even-weighting of both indicies.
I’m not predicting the future of each index, but the relevant variable to consider is that the top two sectors of the TSX currently are roughly 35% financials (think the big banks, insurance, etc.) and 20% energy, while the top two sectors of the S&P 500 are roughly 24% IT (think about the FAANGs – Facebook, Amazon, Apple, Netflix, Google, etc.) and 15% financials.
Very roughly speaking, if you think financials and energy will do better, invest in the TSX. If you believe in the FAANGs and want a flatter distribution of sectors, invest in the S&P 500. (Intuitively, it would appear to me that if you bought the S&P 500 and shorted the high P/E components such as Facebook, Amazon, Netflix, Google, and others such as Tesla, you’d probably have a comparable value index – I’m sure some quants out there have already done this simple work years ago).
An index always consists of components that can be individually analyzed. Conventional financial literature suggests that an index somehow is better than investing in components, but the only inherent benefit of this is the risk-reduction power of diversification rather than any basis in valuation.
Ex-cash forward P/E ratios for FB and GOOG are around 20, no?