Sectors to watch in Canadian equities

Canadian equities have had a strong run this year, with the TSX up almost 15% in 2019.

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But which equities have the best outlook? Canadian banks, financial services and real estate firms all come backed by strong fundamentals, said Stephen Carlin, managing director and global head of equities at CIBC Asset Management, in an Apr. 11 interview.

Here’s why he likes these sectors.

Canadian banks

Carlin, whose firm’s funds include the CIBC Canadian Equity Fund, said banks offer attractive dividend yields at about 4.3%.

“Relative to the interest rate environment and the overall outlook for the banks, we continue to see attractive upside potential,” he said.

Specifically, he highlighted TD Bank and BMO.

“The exposure to the U.S. business differentiates them from some of the other banks,” he said. “Both TD and BMO […] have been growing quite nicely.”

TD opened the year at $67.77 and reached a high of $77.30 on Feb. 27. It opened at $74.14 on May 17.

BMO’s stock price has seen mostly steady gains since opening the year at $88.54. It opened at $103.76 on May 17.

TD, BMO and the other big six banks report their second-quarter earnings over the next two weeks.

Financial services

Among financial services firms, Carlin likes Brookfield Asset Management, as well as some of its subsidiaries.

“They continue to grow their assets under management,” he said. “They have sizeable scale advantages. They just announced an acquisition in calendar Q1 of Oaktree, which we think will drive attractive long-term synergies for the overall business.”

Further, he said a large proportion of Brookfield’s business is fee-based, which is why “they’ve got long-term embedded growth that currently is not trading at a price that reflects full value.”

Brookfield Asset Management’s stock has mostly risen since opening the year at $51.23. It opened at $63.76 on May 17.

Earlier this month, the firm reported lower first-quarter profit compared to a year ago.

Investors attracted to dividend yield might also consider Brookfield Infrastructure Partners, which is part of the Brookfield family, Carlin said.

“Its dividend yield is currently around 4.8%,” he said, adding there is strong long-term growth for the business.

Brookfield Infrastructure Partners has gained since opening the year at $47.59. On May 17 it opened at $56.57.

Real estate

Carlin also highlighted the multi-family real estate sector, specifically Canadian Apartment Properties REIT.

“[It] has a good combination of strong rent fundamentals underlying the prospects for the business [and] dividend yield,” he said. “So total return with the growth in rents and dividends—we remain attracted to that.”

The CAPREIT stock opened the year around $44 and hit a high of $51.81 on Mar. 25. On May 17, the stock opened at $49.32.

Be cautious on auto

One sector within global equities that Carlin cautioned against is auto, where he sees prospects deteriorating.

“We continue to see weakness in the overall demand for autos and new car sales,” he said. “We’re seeing strong weakness in some of the Asian markets, so we would be careful. And while we are very familiar with the company called Magna, it’s a high-quality company but, unfortunately, it’s stuck in a sector where the fundamentals are less desirable.”

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