During market volatility, clients should stay invested.
That’s because “time in the market always trumps timing the market,” says Craig Jerusalim, portfolio manager of Canadian equities at CIBC Asset Management.
“If you look at the TSX over the last five years, the annualized price return has been about 4%,” he explains. “But if you miss the 10 best trading days, you almost entirely wiped out all those gains.”
What’s more, “Volatility should always be expected in the markets.” He calls this week’s events a “market pause” that has helped temper rich valuations and “allowed the ‘E’ in PE ratios to catch up to the fundamentals,” which he characterizes as “decent, not great.”
Regardless, high-quality companies will continue to grow and create value for shareholders over time, he says, adding, “Volatility just creates opportunities for long-term, patient investors.”
The upside of volatility
Jerusalim sees several such opportunities.
“The market is underestimating how stimulative $38 oil is for the U.S., China and all other emerging markets,” he says. While Russia, Iran, Venezuela, Brazil and Canada will suffer from low prices, “at least Canada will partially benefit from the strength of [the U.S.],” he says. “That’s why I’m looking to companies with direct U.S. exposure like Gildan Activewear, Valeant [Pharmaceuticals], CGI [an IT company], and the rails.”
He also likes financials, since they have “a really attractive combination of growth and decent valuations.” They’re not immune to economic woes: “energy-related loan losses could creep higher; there are net-interest-margin pressures from low interest rates.” But, he says, banks “are a powerful oligopoly with a proven record of creating shareholder value. They will cut costs to eke out growth.”
He’s pleased with their 4% to 5% dividend yields, which are growing, as well as reasonable valuations of 10x to 11x forward PE. “Putting that together, financials are not a bad place to ride out this period of volatility.”
Jerusalim also points to Canadian life insurance companies, such as Sun Life and Manulife. “They also have that great combination of long-term growth and attractive valuations,” he says. “Their strong capital generation will allow them to make further accretive acquisitions. We saw Sun Life [on Tuesday] indicating they could make an imminent acquisition, as well as returning money to shareholders via buybacks and dividend growth.”
Reasons to stay calm
Experts attributed this week’s volatility to the U.S. Federal Reserve’s impending interest rate decision and bad economic news out of China. Jerusalim calls both non-issues.
Regarding the Fed, “I don’t think a 10- or 25-basis-point increase is going to trip up a trillion-dollar economy,” he says. “The economy is not in a state of emergency, so the Fed’s funds should not be at crisis levels. I’m actually hoping they raise interest rates as a sign that things are getting back to normal.”
As for China, “Their demand, growth and consumption patterns are all changing. And that’s clearly going to have a ripple effect globally. But what it won’t do is negatively impact the largest and most stable economy in the world: the U.S.”