The financial sector outperformed in 2014, but will experience a more tepid 2015.
So says Craig Jerusalim, portfolio manager on the Canadian Equity team at CIBC Asset Management. He co-manages the Renaissance Diversified Income Fund.
Last year, he explains, “the sector benefited from valuation multiples [that] expanded in conjunction with earnings growth and dividend increases.” Plus, markets saw the start of share buy-backs by banks.
Throughout 2015, however, the financial sector will face additional cost pressures—spending on technology and cyber security will rise—as well as “loaded loan growth and a more normal credit-loss environment.”
Read: What to watch on the TSX
Still, even if banks’ performances dip, says Jerusalim, “it’s reasonable to expect 8% to 10% total returns” due to expected dividend increases of 4% for the group, and because financial stocks are typically stable and predictable.
If clients are looking for an alternative, Jerusalim suggests they invest in life insurance companies. He finds insurers have:
- earnings growth opportunities;
- cheap relative valuations; and
- success in international markets.
Further, they could benefit from rising interest rates—markets were anticipating rates would move up prior to the interest rate drop announced by the BoC in January, and the subsequent lending rate drops announced by banks.
A word on the loonie
Jerusalim hopes the Canadian dollar will remain below par for a long period.
That way, he explains, more manufacturers may learn how to operate efficiently when the currency dips. “When the Canadian dollar was at or above par throughout 2014, it hurt the manufacturing [sector] based in Ontario and Quebec,” he explains.
But now, the companies that survived are thriving with the lower dollar. Since “the Canadian dollar is a lot closer to fair value now and, given the strength of the U.S. economy, I think the Canadian dollar staying low for an extended period is a reasonable outlook.”