Invested in Canada? Monitor these 3 trends

Whether Canada’s market and global standing will be affected throughout 2017 depends on three things, says Colum McKinley, vice-president, Canadian equities at CIBC Asset Management in Toronto. Those are:

• the growing strength of the U.S. economy;
• the impact of the U.S. presidential election results; and
• OPEC’s decision to curtail oil production.

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McKinley, who manages the Renaissance Canadian Core Value Fund, says, “We’re spending a lot of time contemplating what this is going to mean for corporate earnings and results, and [for our] outlook for stock prices throughout 2017.”

Firstly, “If we look at employment as one important gauge, we have seen employment in the U.S. continue to improve.” Unemployment rates are coming down, he explains, and there’s ultimately a healthier consumer; a consumer that’s employed and earning a good income. “And we’re seeing some signs of wage growth.”

These are all positive signs for demand and U.S. economic growth, says McKinley. When you consider Canada, he adds, “We all know our largest trading partner is the U.S. […] Positive signs in the U.S. economy [are] an indication of good things that will happen for Canadian companies.”

Read: Why it’s not too late to buy Canada

“The second thing that is a very significant change in the global landscape is the outcome of the U.S. election,” says McKinley, who plans to monitor the incoming president’s government and policies, particularly those tied to trade and those that appear supportive of businesses and, ultimately, of corporate profitability.

Read: Answer clients’ questions about Trump and the U.S. economy

Third, on the topic of OPEC’s decision to curtail production, McKinley says, “We have continued to monitor the developments in the energy market and we’ve seen corporations cut their capital expenditures to reduce future production to help alleviate [the] supply and demand imbalance that exists in that market, which was keeping oil prices lower,” says McKinley.

Takeaway: There’s more than one way to be exposed to energy, so consider all options.

With oil prices increasing, “OPEC is clearly signaling the desire to support the market and generate a higher oil price, [and] we think that’s going to be positive. Energy continues to remain a very important component [of] the economy in Western Canada, but the whole Canadian market will be affected by our oil price.”

Drilling down on energy

Already, “OPEC’s decision is contributing to a higher commodity price,” says McKinley. “We think that’s going to be a positive for the energy market in Canada and a positive contributor to the economy.”

McKinley is exposed to the Canadian energy market in two ways. First, “we own what we believe are the best quality producers in the Canadian marketplace, so companies like Canadian Natural Resources. Businesses that [have] a strong management team, an attractive valuation [and] balance sheet continue to remain very important,” he explains.

Read: Does an OPEC agreement matter?

Since there will still be volatility in the sector, strong balance sheets are an indicator of companies that can withstand uncertainty, McKinley adds. He is also attracted to companies that have successfully reduced costs.

In terms of how investors will be rewarded as commodity prices rebound, he says, “These companies will capture a greater percentage of that stronger cash flow profitability as crude prices move higher. So their profitability will be better than previous cycles.”

The second way McKinley is exposed to the Canadian energy market is through indirect exposure. “These are companies that benefit from an improved backdrop or an improved energy environment.” For instance, he owns Boardwalk REIT, the largest rental apartment company in western Canada.

Read: REITs could return up to 10.5% in 2017, despite higher rates

McKinley notes, “Rents have come out under pressure the last number of years given the weakness in the economy. We’re now seeing that stabilize and, ultimately, we’ll see rental prices move higher. It’s an exceptionally well-managed company that now has a great valuation and continues to hone some of the strongest or best assets in western Canada.”

As well, McKinley has exposure to SNC-Lavalin, a major Canadian engineering firm. “We’re seeing energy companies come back to work [and] contemplate projects that had been placed on hold because of a lower commodity price. And as they come back to work and these companies have stronger balance sheets and stronger cash flow profiles, that’s positive.”

Read: How to improve your 2017 investment game plan