Q4 2017 Commentary – Mackenzie North American Equities Team* | Mackenzie Investments

Q4 2017 Commentary

Mackenzie North American Equities Team

2017 was a difficult year for Canadian equities as commodity stocks and energy in particular dramatically underperformed. As well, the technology sector led the charge in the U.S. and served as another point of Canadian underperformance given weak technology representation in the Canadian benchmark. The underperformance in smaller cap names was less so in the fourth quarter as Canadian stocks rallied, netting most of the years’ performance in the last three months on broad-based strength across the market. Many of the trends that shaped 2017 have continued early in 2018 so far, with the exception of energy, which has reversed course and has outperformed on the back of much stronger oil pricing.

Commodity prices are responding to a general lack of investment reducing supply while at the same time demand remains strong. Of course, just as the best remedy for weak prices is weak prices, as the saying goes, the reverse is also true. Strong commodity pricing will attract capital to resources and lead to increased supply, serving to reduce pricing and profitability as the cycle plays out. However, it remains early innings for the energy sector, which had been out of favour for a few years. Investors had shifted capital from energy to technology and some of this capital flow may reverse.

Trade disputes and the reworking or nixing of NAFTA have been issues at the forefront of Canadian industry. While we are not going to predict the behaviour of President Trump and negotiators working on his behalf, most likely the Canadian markets and currency would weaken on any announcement that NAFTA is to be dissolved. However, this would likely present an opportunity to increase exposure to Canadian stocks given how intertwined the Canadian and U.S. economies are. In other words, the bark of the announcement is likely to be greater than the bite of reality when it comes to implementation of any revised accord that may create the initial perception of the U.S. “winning”.

We continue to experience a period of synchronized global economic growth which should benefit the Canadian economy. This economic backdrop gives us confidence in our expectations for strong earnings growth which ultimately 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 and the market is no longer cheap.

Our expectations for accelerating global economic growth should result in higher interest rates as real rates and inflation expectations rise. Bank and life insurance company earnings should benefit from higher interest rates. For banks, strong employment trends should limit consumer loan and residential mortgage losses however we are likely entering a period of slower loan growth which will also limit profit growth. We expect select life insurance stocks to rerate higher while seeing less opportunity for a rerating at the banks. In the near term we are constructive on the outlook for oil prices given declining global production coupled with resilient global demand growth. However over the medium term we recognize the risks presented by US shale production growth. With this outlook our stock selection is focused on undervalued companies with low cost production and a strong cash flow profile.

As markets have continued to march higher and valuations have extended, we are finding fewer and fewer absolute value opportunities and have become increasingly selective in our stock holdings. We will continue to take advantage of opportunities as they arise. As a result we have reduced several smaller cap stock holdings while adding to what we view to be undervalued stocks of higher quality companies. As we have stated in previous commentaries, it is always difficult to predict a market top and one must act prudently as the cycle continues to mature.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of December 31, 2017 including changes in unit value reinvestment of all distributions and do and not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

This document includes forward-looking information that is based on forecasts of future events as of December 31, 2017. We will not necessarily update the information to reflect changes after that date. Risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Some of these risks are changes to or volatility in the economy, politics, securities markets, interest rates, currency exchange rates, business competition, capital markets, technology, laws, or when catastrophic events occur. Do not place undue reliance on forward-looking information. In addition, any statement about companies is not an endorsement or recommendation to buy or sell any security.

The content of this commentary (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it.