Canadian equity stronger than it appears

The national equity market is resilient.

It’s supported by strong bank earnings and energy prices, eased fears in the telecommunications sector now that Verizon isn’t coming to Canada, and recent mergers and acquisitions, says Domenic Monteferrante, first vice president of Canadian Equities at CIBC Asset Management. He co-manages the Renaissance Canadian Dividend Fund.

“Gold stocks also bounced back from oversold levels experienced earlier in the year,” adds Monteferrante.

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But the national equity market has lagged those of other developed countries so far this year. That’s because of concerns of a real estate slowdown and lower expected economic growth in emerging markets such as China, which would affect Canadian commodities prices. Equities have held their own despite these factors, he argues.

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Yet there are still concerns, says Monteferrante, including “higher interest rates in the face of modest economic activity and the challenge of corporate earnings growth.”

His view is “the Canadian equity market will move sideways until investors see stabilization of interest rates and a better rebound in Chinese economic growth. In the meantime, Canadian equity performance could likely come from stock-specific developments instead of particular sector leadership.”

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Banks and other financial services are attractive investments because of their long-term valuations and dividend yields. So are energy infrastructure stocks.

Stock prices in the materials sector tend to be volatile, and companies don’t always increase their dividends, so advisors may want to stay away.

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Investing in retail is also something to consider, as the industry is more competitive now.

“The recent arrival of Target, and with Walmart expanding its food offerings, major Canadian grocers like Loblaw and Empire have had to make sizable but sensible acquisitions to ensure some revenue growth,” he says.

“Should these companies succeed in integrating their recent acquisitions, then we can expect low but stable earnings growth, with the prospect of dividend increases over the long term,” he adds.

When it comes to retail, investors should keep an eye on consumer debt levels and employment growth. Profit margins are also a key factor.

He explains: “Any negative developments in this area would hurt the valuation of retail stocks.”

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