When markets are volatile and economies are sluggish, your role is to help clients protect their portfolios.
Doing so now is important, because energy prices are stagnant and the Canadian dollar is weak. At the same time, national debt levels are rising, says Colum McKinley, vice-president of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Core Value Fund.
On the energy front, not only have companies in Western Canada been laying off employees, he adds, but also they’ll likely make further cuts.
One sector that may start suffering is the financial sector, he explains. “Banking is a levered play on an economy. So if we see a slowdown in the economy, [that] will affect the loan growth at Canadian banks. So, with further layoffs in Western Canada, we could see loan losses, or provisions for loan losses, rise from what are fairly low levels today.”
But banks have continued to post strong results so far, says McKinley. “Their wealth [management] businesses continue to perform quite well, and their capital markets-related revenues [are] also quite strong.”
And, he finds, central Canada, industrial Ontario and industrial Quebec “are benefiting from a weaker Canadian dollar, [and] from strength in the U.S. economy, where many of our exports go.”
Still, investors should monitor their portfolios and re-evaluate their defensive investment strategies. As McKinley notes, even though sectors such as consumer staples have historically withstood volatility and offered stability, they can’t be relied on.
“Consumer staples are stocks that have done exceptionally well over the last number of years. There are strong businesses [that] have typically been defensive in weak equity markets. So they’ve helped investors preserve capital.”
But now, “as there’s been volatility in the market [and] people have looked for places to go outside the energy complex, we’ve seen the valuations of these stocks move quite a bit higher.”
McKinley prefers to buy stocks when they’re attractively priced and, at times, when they’re out of favour. So, “the consumer staples sector is one that, today, we’re not seeing a lot of incredible opportunities in based on the valuations of its businesses.”