(Bloomberg) -- As the global economy picks up speed, investors are dusting off the Canada playbook.

Covid-19 vaccinations are gaining momentum and fiscal support is helping the growth outlook, lifting bond yields. That’s a winning set of conditions for the nation’s value-oriented and cyclical stock market, which is outrunning its U.S. counterpart in 2021 after years of lagging performance.

“Canada has what you want” in the current landscape, said Mike Archibald, vice president and portfolio manager at AGF Investments, a unit of Toronto-based AGF Management Ltd., which has C$39.8 billion ($31.6 billion) in assets under management.

The S&P/TSX Composite Index has trailed the S&P 500 nine of the past 10 calendar years but is beating the U.S. benchmark in 2021 with a 7.6% gain. That’s largely because of banks, which are producing a gusher of profits, and energy and industrial companies that are riding economic tailwinds.

Global investors have overlooked Canada for years in favor of countries with greater choice in high-growth technology stocks, primarily the U.S., but valuations and earnings momentum have become attractive, Archibald said.

Canadian equity exposure is also increasing, according to Bank of Nova Scotia analysts. They say the valuation gap with U.S. stocks is still “extremely wide,” with the TSX at a 23% discount on a forward price-to-earnings basis.

“We have started to notice some flows into Canadian-branded equity funds funds/ETFs this year,” strategist Hugo Ste-Marie wrote in a note to clients. “The bleeding of the past few years could be over if the macro landscape improves as we expect.”

Canadian exchange-traded funds have taken in more than $9 billion in less than three months this year, according to data compiled by Bloomberg Intelligence analyst James Seyffart. That’s well ahead of last year’s pace, which saw a total of $22.2 billion of flows, or about $1.9 billion a month, and 2019 at about $17.5 billion.

‘Re-Rating’ Market

“The reflationary environment of robust global growth prospects and unrelenting monetary policy support are likely to embolden sentiment towards the previously-battered value space and prompt a re-rating in the S&P/TSX,” Candice Bangsund, vice president and portfolio manager at Montreal-based Fiera Capital Corp., said via email.

Bangsund, whose firm manages about C$180 billion, predicts Toronto’s index will beat the S&P 500 this year. Financials are nearly one-third of the benchmark; rising rates and an improving economy help insurers such as Manulife Financial Corp. and Sun Life Financial Inc. as well as banks, which see wider lending margins and reduced loan losses.

The first decade of this century was better for emerging markets such as Brazil and commodities-driven developed countries including Canada. “It might well be that the next decade lines up well for non-U.S. markets,” Craig Basinger, chief investment officer of Richardson Wealth, said in an interview.

On the other hand, hiccups in the effort to reopen economies could lower growth and inflation expectations, hindering Canada’s bull case.

“To be clear, we are not suggesting investors should ‘buy Canada’ at the expense of U.S. stock exposures,” but the group is worth a closer look, Archibald said in a note.

“If a sustained cyclical rally moves out of the realm of possibility and becomes a reality, Canadian stocks might, at long last, be something to finally gloat about.”

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