Energy and materials stocks are under pressure.
So, in both sectors, you must be selective about where you deploy capital, says Colum McKinley, vice-president of Canadian equities at CIBC Asset Management. He manages the Renaissance Canadian Core Value Fund.
It’s best to “focus on companies with strong balance sheets and [expectations] of production growth over the next several years,” he adds, noting “some of companies that are considered the who’s who of the energy space in Canada [will continue] to look quite attractive” over the same period.
Read: Help clients look past volatile oil prices
Investors can also consider investing in Canadian banks, says McKinley, because “they continue to provide stability in portfolios, [and] dividend yields of Canadian banks are up around 4%.”
He forecasts their dividends will grow over the next several years. In fact, he adds, “[banks] continue to trade at a discount compared to their long-term average valuations. [They] typically trade at around 11.5 to 12 times earnings, and they’re trading at a discount those levels today.”
Read: Are Canadian banks still worth the investment?
Also, “[banks] are well capitalized and managed. We have a unique [financial] industry in Canada, and it plays a key role in portfolios.”
A note on currency
The loonie has been weaker than the U.S. dollar for some time, says McKinley.
On the upside, having a weak domestic currency is helping offset energy sector weakness. That’s because companies “sell commodit[ies] in U.S. dollars, while most of their costs are in Canadian dollars.”
Read: The pros and cons of currency hedging
Energy companies “are still exposed and affected by lower oil prices,” says McKinley, “but [the drop] in the Canadian dollar will definitely help them.
“We’ll see evidence of that as energy companies report [earnings] over the coming weeks and months—in particular, price realizations and currency gains will [enable] them to generate more stable cash flows, and that’s not being reflected in some of the stock prices today.”
Read: Why you should monitor energy trends
What’s more, the sector is currently supported by “the fact that differentials have narrowed [between] the discount that oil trades at in Canada versus the West Texas Intermediate,” which is used as a benchmark for setting oil prices in the U.S.
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