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The Canadian stock market has lagged this year, especially when compared to larger indices like the S&P 500.

So says Stephen Carlin, vice president and senior portfolio manager of Canadian equities for CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.

He adds there’s been a nearly 20% difference between the year-to-date performances of the Canadian and U.S. markets.

Consider that “the Canadian market has been flat relative to the U.S. market in the last three months. The performance differences have been caused [primarily] by weaknesses in the materials sector,” says Carlin.

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However, he points out “we’ve seen a reversal of that [lagging] performance recently.” As a result, he points out investors should watch the energy and financial services sectors going forward, calling them “bright spots…[that] have continued upside potential from here.”

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Regarding the energy sector, Carlin says Canada benefited from commodity price recoveries late in 2012. For example, he says there was “fairly significant weakness in Canadian oil prices and we’ve seen a recovery from that.”

He adds, “Stocks that would have some exposure to that [growth] are some of your larger-cap names like Cenovus [and] Canadian Natural Resources. They have heavy oil exposure and we’ve definitely seen a recovery in that price environment.”

Read: Scotiabank commodity index rallies

Carlin takes a longer-term view with energy sector, “So when we look at where these stocks are trading relative to their internally generated intrinsic value, or net asset value, we think there’s some good upside potential.”

As for industry developments, he says many players are awaiting approval of the Keystone XL Pipeline project. But the industry is preparing for the pipeline not to be developed. Companies are “looking at mitigating potential risks and have found other alternatives to ship oil,” adds Carlin.

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For example, he says TransCanada Pipelines has already proposed that a portion of its main line be converted into an oil pipeline. This new pipeline would ship oil from Alberta to the country’s eastern provinces, possibly as far as New Brunswick.

And what that means, says Carlin, is “there would be another outlet for Canadian energy companies to sell their product in other regions” if plans for Keystone XL don’t materialize.

He adds companies can also ship oil via rail, though the risks associated with rail shipping have been in the news due to the Lac-Mégantic issue, says Carlin.

Nonetheless, he says that’s an isolated incident and adds “many companies are using rail…to ship their oil to regions in the U.S. that require the heavier grades of crude…produced out of Alberta.”

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Originally published on Advisor.ca

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