Energy and materials stocks are under pressure.
So, in both sectors, you must be selective about where you deploy capital, says Colum McKinley, vice-president of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Core Value Fund.
It’s best to “focus on companies with strong balance sheets and [expectations] of production growth over the next several years,” he adds, noting “some of companies that are considered the who’s who of the energy space in Canada [will continue] to look quite attractive” over the same period.
Investors can also consider investing in Canadian banks, says McKinley, because “they continue to provide stability in portfolios, [and] dividend yields of Canadian banks are up around 4%.”
He forecasts their dividends will grow over the next several years. In fact, he adds, “[banks] continue to trade at a discount compared to their long-term average valuations. [They] typically trade at around 11.5 to 12 times earnings, and they’re trading at a discount those levels today.”
Also, “[banks] are well capitalized and managed. We have a unique [financial] industry in Canada, and it plays a key role in portfolios.”
A note on currency
The loonie has been weaker than the U.S. dollar for some time, says McKinley.
On the upside, having a weak domestic currency is helping offset energy sector weakness. That’s because companies “sell commodit[ies] in U.S. dollars, while most of their costs are in Canadian dollars.”
Energy companies “are still exposed and affected by lower oil prices,” says McKinley, “but [the drop] in the Canadian dollar will definitely help them.
“We’ll see evidence of that as energy companies report [earnings] over the coming weeks and months—in particular, price realizations and currency gains will [enable] them to generate more stable cash flows, and that’s not being reflected in some of the stock prices today.”
What’s more, the sector is currently supported by “the fact that differentials have narrowed [between] the discount that oil trades at in Canada versus the West Texas Intermediate,” which is used as a benchmark for setting oil prices in the U.S.