U.S. investors looking for a cheap way to play the global recovery may want to look north

Published Wed, Jun 23 202110:09 AM EDTUpdated Wed, Jun 23 202111:50 AM EDT

If U.S. stocks look richly valued after a strong start to 2021, American investors may be better served by looking northward for opportunities, according to Bank of America. The bank's chief U.S. equity strategist told clients on Tuesday that the Canadian equity benchmark trades at a significant discount to the S & P 500, and in her opinion, is due for a catch-up. As of Tuesday's close, the S & P/TSX Composite, Canada's main stock benchmark, was up more than 15% for the year. Despite that gain, the TSX index trades at just 17 times forward earnings compared with the S & P 500's 21.4 times. By that gauge, the S & P 500 is trading at its richest valuation since the tech bubble of the late 1990s and early 2000s, according to Bank of America strategist Savita Subramanian. "We believe the discount is overdone, especially when the composition of the TSX is much better positioned to benefit from the global economic recovery, which we believe is intact," she wrote. "We believe international stocks may be a better way to participate in the cyclical upswing, and Canada looks particularly attractive given its heavy exposure to cyclicals, commodities, and smaller caps, as well as its exposure to the U.S. economy that is leading the recovery," Subramanian added. Bank of America likes the TSX index for its greater exposure to energy and materials versus the S & P 500. Commodity sectors represent over 25% of the index compared with less than 6% of the S & P 500. That bodes well for those with exposure to Canadian equities as the global recovery from the Covid pandemic accelerates outside of the U.S. and fosters demand for the energy and agricultural commodities exported by Ottawa. "Follow the commodity cycle," Subramanian advised her clients. "Despite a 46% surge in commodity prices [year over year], the TSX has underperformed the S & P 500 by more than 10 percentage points over the past 12 months." The implication is that, with Canada soon expected to see a sharp rise in its number of vaccinated residents, the gap between the TSX index and the S & P 500 could narrow. Some popular Canadian funds include the iShares MSCI Canada ETF and the BMO Low Volatility Canadian Equity ETF , up 21.8% and 15.2%, respectively, in 2021. Despite the overarching optimism on the country's stocks, Subramanian noted that a slower-than-expected economic recovery in the U.S. or Canada would challenge her thesis. So, too, could China's recent announcement to manage commodity inflation if Beijing continues to impose a cap on how much its traders are permitted to pay for various materials. — CNBC's Michael Bloom contributed reporting.

Philip and Karen Smith | Getty Images

If U.S. stocks look richly valued after a strong start to 2021, American investors may be better served by looking northward for opportunities, according to Bank of America.

The bank's chief U.S. equity strategist told clients on Tuesday that the Canadian equity benchmark trades at a significant discount to the S&P 500, and in her opinion, is due for a catch-up.

As of Tuesday's close, the S&P/TSX Composite, Canada's main stock benchmark, was up more than 15% for the year.

Despite that gain, the TSX index trades at just 17 times forward earnings compared with the S&P 500's 21.4 times. By that gauge, the S&P 500 is trading at its richest valuation since the tech bubble of the late 1990s and early 2000s, according to Bank of America strategist Savita Subramanian.