The Canadian small-cap space will be volatile throughout 2016, but investors can look to gold and energy for opportunities.
So says Jennifer Law, portfolio manager and vice-president of Canadian small cap equities at CIBC Asset Management. She adds, “After gold peaked in 2011, we had a number of years where we saw gold prices come down. [But] we’re now sitting at a nice support level,” with the price of gold sitting above $1,200 per ounce.
Further, she predicts gold prices could “trend higher given the volatility in the market, and the uncertainties in global financial markets.”
Read: TSX outpacing rival benchmarks, for more on gold’s impact
As a result, Law has been increasing her gold positions since December 2015. “Investors are going to gold as a safety measure. So, we’re adding to both the commodity itself and to some gold names that have free cash flow.” Two names she favours are Detour Gold and Semafo Inc., which both have “free cash flow at a $1,200 gold price.”
What about energy?
The energy space will also offer greater upside than downside this year, says Law. But identifying opportunities is tough, she adds, given “the volatility in the market. We’ve seen days where energy equities have been up double digits, and we’ve seen [them] down double digits.”
For now, she suggests adding to energy positions selectively. But, “We think energy prices will be higher by the end of the year and [even] higher 12 months out. We just need to ride through that volatility. At current prices, the industry doesn’t work.”
On the upside, says Law, “some of our natural gas names have performed well on a year-to-date basis,” due to a better near-term pricing environment for natural gas. And, she’ll continue to add to her oil weights, with a focus on companies that have strong balance sheets and good cost structures. Her fund’s top ten holdings include Spartan Energy and renewable energy power provider Boralex.
She also favours energy service companies. “[They] have the greatest amount of leverage to a rising oil price. However, [they’re] probably the most vulnerable names right now.”
Still, “The energy service names we like include Secure Energy and Canadian Energy Services & Technology. These names are down 50% to 60 % from [their] 52-week highs [but] both are paying a dividend while wait[ing] for the cycle to recover. Both have quality assets and are run by experienced management teams.”
Regardless, Law says, “We see capital expenditures in the energy space coming down. [And], we think Q4 reporting is going to be quite difficult for the energy service companies,” which is why investors need to focus on “balancing the natural gas, oil and energy-service components” of their portfolios.