Stock markets may be at a high, but they still have an upside.
That’s due to a combination of four factors, says Gary Chapman, a senior portfolio manager and managing director of Canadian equity at Guardian Capital. He manages the Renaissance Canadian Growth Fund.
Those reasons are:
1. External liquidity
“Even though [the U.S. Federal Reserve] is reducing their tapering,” says Chapman, “it’s still putting money into the system and it’s still a little bit…away from withdrawing liquidity and raising rates. That external liquidity tends to drive stocks.”
2. Internal liquidity
Chapman finds there’s been an increase of capital within investors’ cash holdings. But, “as the Fed tapers, there will [likely] be a movement of cash from retail investors as they move towards stocks.”
3. Cheap valuations
“Valuation metrics are fine, relative to historic mediums and means. [Also], stocks are cheap relative to interest rates,” he adds.
What’s more, he’s not worried about what will happen when short-term interest rates rise. “The bull market will still be on,” he predicts, since “stocks and interest rates have to rise a lot more in order to correct the tremendous undervaluation relative to interest rates.”
4. Global economic stability
The U.S. economy is improving. At the same time, China “has the monetary and fiscal policy firepower to ensure a soft landing, [while] Europe has bottomed. We don’t think Europe’s going to drag the rest of us down,” says Chapman.
As people start to invest, they should look for good drivers of growth. Currently, he and his team are comfortable with balance sheets and stocks prices since companies have the potential to post higher earnings in 2015.
“There should be a bit of a tailwind from earnings growth this year,” he notes, which will help companies outperform. In particular, he’s focusing on Canadians companies that export to or have operations in the U.S.
“We must, by mandate, be at least 90% invested,” says Chapman, “so at maximum, we can have 10% cash.” Right now, “our cash is towards the 2% to 3% range [and] we’re a little bit more invested than we might otherwise be.”