Stephen Carlin considers daily how housing exposure affects his portfolios. He forecasts that the rise in housing prices isn’t a sustainable trend, but adds, “I’d be very careful about using a [term] like housing crash.”
That said, “In due course, we are going to see a slowdown in housing,” he explains, citing new measures such as higher mortgage insurance premiums. Carlin is managing director and head of equities at CIBC Asset Management, and co-manager of the Renaissance Canadian Dividend Fund.
Canada’s hot housing market will also remain on the minds of policymakers — that’s evident in cooling measures recently introduced in Ontario, such as the 15% foreign buyers tax for the Greater Golden Horseshoe region, among other regions.
When considering his exposure, Carlin assesses tail risk in uninsured mortgages. On the upside, those mortgages are “a very small portion of the equity of Canadian banks,” he says. As a result, “the Canadian banks could easily withstand and comfortably manage through a slowdown in the housing market.”
The health of the financial sector matters because his fund has a relatively large weighting in financials: more than 30% as of May 10, 2017. Carlin is optimistic because, beyond housing, “there [are] plenty of other components of the banks that we like,” including wealth management and retail banking.
Further, he’s not concerned about the recent downgrading of Canadian banks by Moody’s Investors Service, the credit ratings agency. “There’s no financial evidence today that there’s a problem,” says Carlin. “The rating agencies are overreacting relative to the information and the statistic,” and not considering banks’ low exposure to the Canadian mortgage business.
In his view, “the Canadian financial services sector remains in very strong shape.”
Still, even though banks have performed well year-to-date, Carlin notes he’s broadly exposed to other segments of the financial sector, including life insurance.
These days, “We see slightly better upside potential in Canadian insurance,” he says, adding that lifecos have improving fundamentals and valuations that are “more in line [with] the longer-term trend.” Meanwhile, he finds banks have relatively high valuations compared to historical trends—in 2016, Carlin also suggested comparing life insurers and banks in the short term due to more opportunity in the insurance space.
To account for this, Carlin says, “Tactically, we’ve shifted a little bit of our weight away from the banks and into the lifecos.”