Mackenzie North American Equities Team
The first quarter of 2018 was the most volatile since early 2016. Most likely, this volatility will temper somewhat as the year progresses. However, investor nervousness may be elevated as they look for anything that could reinforce negative sentiment. With so many seemingly out of left field pronouncements and developments coming from our friends south of the border – many of which get retracted just as quickly as they surface – it feels as though it will be more and more difficult to surprise investors. This could be good for markets if nothing material surfaces for the duration of the year. Most likely the earnings lift from tax savings in the U.S. is priced in to stocks, so guidance from management about how the rest of the year is shaping up in terms of top line growth will be paramount.
The portfolio management team is cautiously optimistic on the outlook for Canadian equity markets. The Canadian economy is expected to be the beneficiary of ongoing synchronized global economic growth. This is expected to drive decent earnings growth for the overall market which should be positive for equity market returns. We believe earnings growth will drive equity market returns going forward as valuations are generally back to historical averages.
We expect interest rates to continue rising as we progress through the economic cycle. This should be positive for earnings in the financial services sector. Bank fundamentals remain sound although we expect a slowing housing market and relatively high consumer debt levels to result in moderating loan growth in the period ahead. We see select opportunities among life insurance stocks which are expected to re-rate higher from depressed valuation levels. Over the near term we are constructive on the outlook for the energy sector as declining global oil production together with rising global demand is expected to continue driving oil prices higher. Commodity prices in the energy sector are expected to remain volatile as higher prices spur a supply response particularly from US shale producers. Given our outlook we are focused on undervalued energy stocks from companies with low cost production and a strong cash flow profile.
Base metal prices are expected to remain volatile with an uncertain outlook for economic growth in China. The outlook for gold and precious metals remains unfavorable although we continue to monitor select opportunities in the sector. We generally see better dividend opportunities and less risk and volatility in other sectors.
We continue to monitor key risks in the market. There is a degree of uncertainty as stemming from proposed and threatened U.S. trade tariffs coupled with possible retaliatory actions from other nations which has the potential to disrupt global trade. For Canada the risk is even greater as the outcome of ongoing NAFTA negotiations has the potential to negatively affect select exporting sectors and the economy at large. We also continue to monitor the effects of higher interest rates on global economic growth. The global economy has been supported by easy central bank policies while we may now be entering a period of a tightening policy bias. This could cause increased equity market volatility going forward and possibly lower equity valuations if rates overshoot to the upside.
While stocks were fully priced through most of last year according to our estimates of fair value, the downturn in the Canadian market in particular has generated some attractive opportunities.