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Correlation snaps between emerging markets and Canadian stocks

Investors look at computer screens showing stock information at a brokerage house in Shanghai, China, April 21, 2016.

Aly Song/REUTERS

Canadian investors should buy emerging market stocks as they've stopped moving in lockstep with domestic equities, according to one of the top strategists at the world's largest money manager.

While emerging markets have increased their exposure to technology and consumer companies, Canada is still focused on the financial, energy and materials sectors, said Kurt Reiman, chief strategist for Canada at BlackRock Inc. The gap between the S&P/TSX Composite Index and MSCI Emerging Markets Index is one of the biggest on record.

"Investing in emerging markets today gives Canadians access to sectors that are underrepresented in Canada and also to the theme of the emerging market consumer," Mr. Reiman said in a phone interview Friday. He prefers Asia but said broad exposure through the MSCI EM index is "a good place to start."

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A decade ago, financial stocks accounted for 21 per cent of the MSCI EM Index and energy and materials made up 15 per cent each. Today, the top three sectors are technology at 25 per cent, financials at 24 per cent and consumer discretionary at 11 per cent, according to Bloomberg data.

By contrast, the S&P/TSX looks a lot like emerging markets did in 2007 -- 34 per cent financials, 20 per cent energy and 11 per cent materials. The MSCI EM index is up 17 per cent year-to-date, while the S&P/TSX has lost 0.6 per cent.

Mr. Reiman sees five reasons to like emerging-market equities if you're a Canadian investor: they're relatively cheap, return on equity is improving, the global economy is accelerating, risks in China are abating and the correlation with Canada is breaking down.

"I've been rather surprised by the gap in performance between Canada and emerging markets despite the fact that we were overweight," he said. "The relative performance and the sharp decline in correlations has exceeded even my initial expectations."

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