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Craig Jerusalim, Senior Portfolio Manager at CIBC Asset Management.
Delta has definitely been adding to some of the fear factor and market uncertainty, which is never good for equities, especially when markets are trading at or above their long-term valuation. And on this last point, Canada looks a lot healthier than the U.S. Benchmark indices.
The TSX is trading only about one multiple turn higher than its long-term average, while the S&P 500, at 20 times forward earnings, is still over three multiple turns higher than its long-term average.
But back to the Delta variant. Delta is not changing the outlook that I have for equity markets, which is calling for continued growth as the economy slowly reopens and that’s largely because we’ve now seen the playbook before. The downside cases known and more importantly, corporations, central banks and governments know how to react and stimulate when and where needed.
As for changes in the portfolios that are starting to occur, they’re only starting to occur on the margin because when you start with a high quality philosophy, leading companies don’t fall in and out of favour very often. In companies like Intact Financial and Brookfield Infrastructure, Canadian Apartment REITs as well as CNQ and Tourmaline on the resource side, are well positioned to weather almost any economic environment that COVID or any other unexpected events can throw at them at any time.
So excuse the pun, but drilling down further into that cyclical mix, I’m definitely seeing more potential upside in energy and financials relative to materials, as Delta could have a greater impact on Chinese demand than prior waves. And while energy demand may be hit as well, there seems to be a lot more supportive supply side story, underpinning a $60 to $70 WTI price, that doesn’t necessarily exist for base and precious metals.
Additionally, at that $60 to $70 price, some of the companies I mentioned like CNQ and Tourmaline are extremely profitable and will continue to pay down debt, grow their dividends and grow their production per share as well.
One additional aspect that could throw a wrench into these plans, especially around the Delta variant, is the impact on children. Vaccines still haven’t been approved for children, so that might delay some of the reopening optimism that we had been hoping for. Now, Pfizer and Moderna and some of the other leading companies are working on vaccines for younger and younger children, so it’s just a matter of time before those breakthroughs occur and once that happens, well then I think we will ultimately be able to get past this COVID period. However, it could ultimately end up being a 2022 event, as opposed to seeing the all clear at the end of 2021.