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Colum McKinley, managing director and chief investment officer, global equities, CIBC Asset Management.
Today is a very interesting environment in equity markets. If we look at year to date — and these numbers are as of Sept. 30, 2019 — the TSX is up 16.3% total return, so including dividends, up 19%. The S&P 500 in U.S. dollars over that same timeframe is up 18.7%, total return of 20.5%. So both markets have done incredibly well for equity investors, and today, at current prices, we’re within 3% or 4% of all-time record highs.
And so why is this interesting? It’s really interesting when you consider the backdrop that is unfolding for equities as we have moved through 2019. We have a global trade battle between two big economies, between the U.S. and China. That is incredibly significant. We have an unresolved issue with Brexit and the uncertainty that that could create in the European economy. We have an active movement to impeach a president and if we look at economic data that we’re seeing today, it’s around the globe, a steady flow of weakening data.
So while there’s plenty of positive things we can talk to, all of the news at the margin is pointing to things slowing or getting weaker and so for us that equates to an environment where we want to be very cautious with our client’s capital. Across portfolios we have lowered risk, we have raised cash, we’ve increased the quality of the underlying holdings. With a lot of uncertainty in the air, we want to be positive to preserve capital and position to preserve capital, but we also want to eventually be able to take advantage of that volatility. Out of the uncertainty that may unfold will be some incredible buying opportunities that we want to take advantage of for our clients.
TSX banks have continued to do quite well year to date. As of Sept. 30, stock prices are up around 13% — including dividends, they’ve delivered a total return of 16.5%. Over the long term we think that banks will continue to be a very strong component of Canadian investors’ portfolios. They’re simply very well managed, well-established, strong businesses that are competing in a very unique financial market and it’s a market that’s not going to be without its challenges. Obviously today’s rate environment, where rates have moved lower, that does challenge the net interest margins for the banks. But banks have the experience to navigate and manage through this. So if we look at the near-term earnings, I think the capital markets businesses are likely to continue to face challenges. That is something that is well expected by the management teams and so they’re taking steps to address that as they think about their cost structure.
The lending for consumer businesses has actually — so for mortgages and personal loans — this has actually started to re-accelerate. It’s an area where we’re starting to see green shoots of further growth and commercial lending continues to be quite strong. When we look at the Canadian banks today, I think that one of the things that we’ve seen over time, they’re very well managed when they think about their capital positions and capital positions for the banks are incredibly strong today. Which again, that gives us confidence in their ability to weather any uncertainty that may persist or where we may see volatility rise.
Unlike other parts of the market that… I think all parts of the market are facing risk. I think what’s a little different for the banks is their valuations remain quite attractive versus historical levels. They’re trading at below average valuations. Banks have proven over and over again their ability to navigate uncertainty. As we enter a period of that today, I think they will again be successful. I think over the long term they’re going to continue to deliver strong dividends and strong dividend growth.
We have large overweight positions across many of the banks, including Royal Bank, CIBC and TD Bank today. I think that each of these banks have incredibly strong franchises. They have very strong, deep relationships with clients. They have management teams that understand the challenges in their businesses that are coming. They’re well positioned and well diversified. The Canadian banks that are growing their diversification outside of Canada, I think that will be incredibly important over the next five years, 10 years out over the long-term. So the banks that are best positioned, like I mentioned, TD, Royal Bank and CIBC, we think are going to continue to execute well, deliver great products and services to their clients, which will ultimately drive their stock price.
- CIBC Monthly Income Fund