Canadian equity markets might be in for a choppy ride in the months ahead, suggests National Bank Financial in a research note

NBF says that although Canada is a first world economy, and one of the healthiest first-world economies at that, recently its stock market has been behaving more like that of an emerging market country.

“Even if Canada is a member of the select G-7 club and probably has the best fundamentals in the group, its local equity market has recently had closer ties with emerging markets in terms of performance than with the benchmarks of its major U.S. partner ) or overseas economies. It reports that the S&P/TSX’s correlation with emerging markets over the past two years is 0.82 (perfect correlation is 1), while its correlation with the S&P 500 is 0.68, and the correlation with EAFE is 0.7.

“It is worth noting that the energy and materials sectors represent a much bigger part of the market capitalization in Canada (45.2%) relative to its US counterpart (12.6%) or versus the EAFE (16.3%),” it adds.

“With a U.S. economic slowdown in the offing and Chinese authorities trying to slow capital spending projects in order to avoid a potential boom-bust scenario, the current environment could easily put the Canadian S&P/TSX under pressure in coming weeks,” NBF suggests.

“After all, as mentioned by the previous Fed Chairman Alan Greenspan, if demand and supply on commodities are not very sensitive to prices in the short run, it is not the case over the medium and long term,” it says. “Time will prove if holders of the new financial instruments heavily marketed since 2003 (ETFs, commodity funds, etc.) were long-term investors or trend followers.”

“Fasten your seatbelt for a probable bumpy landing on commodity prices and the Canadian equity benchmark,” it concludes.