These days, it’s key to understand where interest rates are likely to go.
Andrew Zimcik, a member of the fundamental equity team at Connor, Clark & Lunn Investment Management in Vancouver, says, “The level and direction of interest rates is important when pricing equities.” The challenge, however, is that North American rates are diverging; usually, “it’s far more common to see North American [interest] rates move in the same direction than to see them move in opposite directions.”
Still, Zimcik adds, “many investors, including us, expect that the divergence between Canadian and U.S. rates will continue,” with the Fed looking to normalize while the BoC is concerned about sluggish growth.
What can you do?
First, know that the U.S. rate is key for many Canadian companies, says Zimcik, whose firm manages the Renaissance High Income Fund. He notes U.S. rates are the global benchmark and, “with this in mind, a focus for us is to own companies that benefit from an environment of rising rates.”
Zimcik says he’s looking for dividend growers tied to economic expansion, given the impact of higher interest rates on high dividend-paying equities. “More than 90% of the companies we own are dividend growers that […] we expect [will] outperform if growth and, by extension, interest rates rise in the coming year.”
Zimcik points to life insurance companies like Sun Life and Manulife, which tend to offer higher dividend payments to shareholders when growth and interest rates are going up. Manulife was among the high income fund’s top 10 holdings, as of December 31, 2016, as were three of Canada’s biggest banks (TD, RBC and Scotiabank).