Canadian stocks

just notched their best year

relative to United States shares

in two decades, and money managers are betting the outperformance has further to run as investors

concerned with volatility

in American equities

seek calmer markets

.

The

S&P/TSX Composite Index

jumped 28 per cent last year, far outpacing the S&P 500’s 16 per cent gain. The trend has carried into January, with the Canadian benchmark up 3.7 per cent, compared with a 1.7 per cent advance for U.S. stocks. Just two weeks into the new year, a string of shock developments — including the abrupt ouster of Venezuelan President Nicolas Maduro, a criminal probe targeting the Federal Reserve and major banking policy announcements delivered via social media — have unsettled U.S. markets and pushed investors toward less volatile alternatives.

“We still feel the U.S. is exceptional. It’s still the most competitive economy on Earth, but it’s becoming less competitive,” said Laura Lau, chief investment officer at Brompton Funds. “So we just felt that the other countries are starting to step up and realize that they’ve been letting basically the U.S. eat their lunch.”

Lau in particular likes Canadian gold miners like Agnico Eagle Mines Ltd. and European defence names like Rheinmetall AG, she said.

The Trump administration’s escalating attacks on the Fed and Chair Jerome Powell are viewed by market watchers as the most significant potential source of disruption for U.S. assets.

“This could reignite a soft ‘sell the U.S.’ trade that we saw post ‘Liberation day’ in April of last year, with U.S. yields rising, equities underperforming, and the U.S. dollar depreciating,” Bank of Nova Scotia’s Hugo Ste-Marie and Jean-Michel Gauthier wrote in a note to clients Tuesday.

Brian Madden, chief investment officer at First Avenue Investment Counsel, said the Canadian dollar is structurally undervalued against the greenback.

“The fact that the executive branch seems hell-bent on undermining the credibility and the independence of the central bank makes the case for hedging U.S. dollar currency exposure even that much stronger,” Madden said in a phone interview.

Still, not all strategists are turning cautious on U.S. markets. Bank of Montreal’s Sadiq Adatia remains constructive on U.S. equities, arguing that resilient consumer spending will deliver stronger-than-expected economic growth in the coming quarters. He also rejects the view that artificial-intelligence stocks are broadly overvalued and headed for a post-bubble crash.

Any resurgence of the “sell America” trade could put renewed pressure on the U.S. dollar and weigh further on stocks as “global investors demand a higher risk premium for U.S. assets,” Janus Henderson Investors global head of client portfolio management Seth Meyer wrote in a note Monday.

“Near-term volatility will hinge on whether Congress or the Treasury Department can orchestrate another simmering down of the administration’s rhetoric,” Meyer added.

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Bloomberg.com