Bank CEOs don’t share concerns that Canada’s real estate market will be the next shoe to drop after falling commodity prices, with Bharat Masrani of Toronto-Dominion Bank suggesting that any correction would be “orderly."Rich Schultz/The Globe and Mail
As the waning commodity supercycle threatens to take its toll on Canadian equities, portfolio managers are increasingly turning toward the Canadian financials.
"Financials have gotten cheap, and haven't kept up with the market," said Barry Schwartz, chief investment officer at Baskin Wealth Management, who has increased his weighting of this sector over the past year. "What I'm pretty confident about is that we'll be keeping our money in banks, still getting mortgages, loans and insurance, and I don't see any new entrants arriving in this space."
On March 19, Mr. Schwartz announced the firm had recently eliminated its holdings of energy producers.
"We know that with the price of oil at these levels, our favourite energy names (Suncor and Canadian Natural Resources) aren't covering their capital budgets and dividend payments," he wrote on the company's blog. "As a result of the dramatic drop in the price of oil, many energy producers will need to borrow a lot of money to fund their current operations. We have no intention of sticking around and waiting for the mess to get cleaned up."
Baskin Wealth Management has been reducing its exposure to resource stocks over the past few years, according to Mr. Schwartz, as the fluctuations of commodity prices make it difficult to be sure that firms will able to consistently and sustainably grow their dividends.
The share prices of Canadian banks have been punished as the price of oil has collapsed, though finance executives have downplayed their exposure to the sector. Since the OPEC meeting in late November, when oil prices began to slide in earnest, the S&P/TSX composite bank index is off 9 per cent. The decline in commodity prices has also spurred concerns that Canada's lofty real estate market will be the next shoe to drop.
Bank CEOs certainly don't share those fears, however, with Bharat Masrani of Toronto-Dominion Bank suggesting that any correction would be "orderly" and Royal Bank of Canada's David McKay opining that the demand for homes remains strong.
"Low interest rates have fuelled higher prices; as interest rates rise, there should be a softening in real estate," said Robert Gill, vice-president and portfolio manager with Lincluden Investment Management, who has also increased the share of his portfolio in financials over the past year. "That's to be expected, and should happen at a fairly measured pace."
He highlighted Intact Financial as a recent new buy, noting that its aggressive advertising campaign was resonating with consumers and beginning to bear fruit. Power Financial Corp. and its parent company the Power Corp. of Canada were also attractive names, according to other portfolio managers.
In an era of ultra-low bond yields that force investors to "search for yield" in riskier corporate debt or increase their duration of sovereign debt holdings in order to generate a decent return, the average dividend yield for the Big Six Canadian banks – at above 4 per cent – remains a big selling point.
"A lot of the appeal of holding a bank is about securing a good cash flow," said David Cockfield, managing director and portfolio manager at Northland Wealth Management. "We don't want to depend on bonds for that, and the likelihood of dividend cuts from the Canadian banks is extremely remote."
Michael Newton, portfolio manager and director of wealth management at ScotiaMacLeod, says his weighting of Canadian financials is as low as it has ever been, representing 14 per cent of his core portfolio.
Other investment opportunities besides the banks are "much more attractive to me," he said. "In Canada, though, there is a lack of alternatives, but if you look at the past three to four years, the Canadian banks have been something people were happy they owned."
Another popular refrain from fund managers has been a trend toward adding to their U.S. equity holdings in light of the dearth of investment opportunities north of the border.
"There's a premium on the remaining Canadian non-commodity stocks, like Valeant, Gildan and Dollarama, and I'm not paying nosebleed valuations," said Mr. Schwartz of Baskin Wealth Management. "I've gone up and down the TSX with a fine-toothed comb a million times, and there are no new names that are exciting to me."