In the short-term, Canadian investors should choose life insurers over banks.
“As we look at the Canadian equity environment, and as we overlay the growth outlook for life insurers and banks, we prefer the opportunities for the life insurance sector,” says Stephen Carlin, head of equities and managing director at CIBC Asset Management. He manages the Renaissance Canadian Dividend Fund.
One reason for this is the banking sector’s exposure to the low commodity price environment, he adds, which will likely result in modest headwinds with respect to credit.
So, investors can expect better earnings growth from life insurers. “We see opportunity for the life insurance industry to continue to grow dividends. And, especially in Canada, we see very attractive valuations.”
For example, Carlin likes Manulife Financial because it’s undervalued. “The stock should be trading at a higher level than it is today. [This is evident] when we look at the relationship of the price the stock is trading at relative to [its] current book value. We compare that to the return on equity the company is generating.”
Within the last few months, “We’ve increased [our] weighting in Manulife since the stock pulled back following the company’s Q4 earnings announcement. At that time, the company took another write-off in the oil and gas sector, which caught the market a little offside with respect to the size and quantity of the write-off.”
But Carlin’s optimistic. “From our perspective, [oil and gas weakness] is a temporary situation. We have chosen to add Manulife because the stock price doesn’t reflect the true fundamentals of the business.”
Another life insurer that Carlin favours is Sun Life Financial, for similar reasons. But, “The difference between the two businesses right now is Manulife trades at an even more attractive valuation than Sun Life, [but] we have increased weights in both companies.
Overall, he adds, “Our insurance sector weighting has been overweight for a couple of years now, given our view on the outlook for the sector.”