Mackenzie Minute: March 17, 2017
William Aldridge, Vice President and Portfolio Manager of the Mackenzie All Cap Value Team, discusses the recent performance of the energy sector in contrast to the Canadian banks, as well as valuations.
Certainly in the last week or so, it’s been all about energy. It’s really the reason why Canada has underperformed the US year-to-date so far. The energy sector is the only sector in the red. The reason, as we know in the energy markets, is about supply and demand, so that gap between supply and demand is not shrinking as quickly as some people would like to see, and as a result that’s keeping a lid on pricing. So Canadian companies are able to make money at these prices – they’re just not able to grow production and that’s really one of the key drivers that would lead stocks to outperform over time.
The most important consideration for a value investor for our portfolios is valuation in general and we are certainly finding valuations to be somewhat stretched here. We’ve gone through eight, now coming on nine years, of a bull market and that’s led to multiples in general expanding across the board. In fact, there has been very little earnings growth. It’s been mostly multiple expansion that has driven the market higher and that has to be a concern. So we find that stocks generally are trading at the high end of their historical trading range, some higher, and that’s making it difficult for us to find opportunities for the portfolios. Our turnover is very low and this is consistent with what you would see at the tail end of a bull market.
One of the big reasons why we outperformed last year was our weight in the financial stocks. So we’ve got a significant weight in Canadian banks and I think people have come to understand that the Canadian banks are very resilient entities. They’ve got a number of levers they can pull to drive earnings higher and therefore, drive dividends higher and this of course is supporting the stocks and leading them to move higher. So Canadian stocks have performed very well in a market where some people have questioned how they will perform. If the Canadian economy is doing poorly, how can Canadian banks do well? And yet we’ve seen Canadian banks able to put up very strong earnings, and as a result their multiples have expanded. The stocks have performed very strongly.