(July 2008) To buy or not to buy Canadian equities — that’s the real question many in the financial industry are asking themselves these days. The main index continues to outperform global indices, even in the downturn, but can the party continue?
“Some of the caution is warranted,” says Garey Aitken, Bissett Investment Management’s new CIO. “It’s a market with a great deal of uncertainty.”
Aitken, who took over from Bissett’s president and CIO Fred Pynn in June, says Canada’s market is a concentrated one, which has been great the last few years, but could pose problems in the future. “There’s risk when you have so much of the market tied to the fortunes of commodity prices,” he says. “Then bring in financials, which are a quarter of the index, and there are a few things that, if they go wrong, could really derail the market.”
The problem with the Canadian marketplace, says the manager of the Bissett Canadian Equity Fund, is that it’s not as diversified as other countries. To counter that problem, Aitken makes sure the companies he holds are varied from one another.
For example, financials make up just over 38% of the Canadian Equity Fund, but Aitken doesn’t only own banks. “With one-off names like Home Capital or TMX Group, we can get diversification within sectors,” he says. “We could have 40% financials and another manager could have 40% financials, but depending on the makeup of that, the concentration could be entirely different.”
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Still, no matter how diversified someone is in financials, it’s impossible to get away from the problems facing the sector in the United States. Aitken says Canadian banks operate in the U.S., so an aversion to financial institutions down south will also have an impact north of the border.
When a sector is in trouble, investors tend to jump ship, even if parts of that specific market are still doing well. “There’s a knee-jerk reaction to paint a sector with the same broad brush,” Aitken explains. “If there’s some exogenous factor that’s negative for financials, it’s going to impact all of them, rightly or wrongly.”
But lower valuations mean more purchasing opportunities, even in Canada where finding a deal in our mature market could seem difficult. Since his firm uses a bottom-up approach to investing, Aitken won’t pinpoint a specific sector that’s ripe for the buying, but he points to a company like Canadian National Railway Company, which has been hit hard by rising fuel costs.
“They’re suffering to the extent that the economy slowed down and trade slowed down. That hurts on the volume side of things and it loses a bit of pricing power,” says Aitken. “But I think this is just a classic case of where the market overreacted.”
He says many in the industry have a tendency to “extrapolate bad news forever” and think oil will keep rising $10 a barrel per month. “That’s why you have a little shock or news event and you see enormous moves in stock prices.”
Despite CN’s wildly fluctuating stock price, Aitken thinks the company has strong growth potential and good valuations.
Besides offering buying opportunities, volatile times allow investors to make moves on “their own terms,” says the Calgary-based fund manager. He admits that the ups and down make investors anxious, but advisors shouldn’t let uncertainty cloud their clients’ judgment. “You try to keep your head on straight and don’t lose track of what you do,” he says. “Let the market come to you, and treat it as an opportunity, not a concern.”
However, it’s important not to chase an investment. “Someone who wasn’t buying BMO two weeks ago, and wants to buy it now, but it has moved up 20%, ask them why? What was the mindset two weeks ago that you wouldn’t buy it, but you want it now?”
The only thing more volatile than the markets right now is the price of oil, so Aitken is not about to predict where he sees prices going in the future. He can’t understand how others can say where oil will go, either.
“There are good arguments to support the fact that oil prices should be higher now than they were a decade ago, but there are a lot of unknowns behind oil prices,” he explains. “You hear people talking unequivocally that they know oil is going to be $80 or $200 next year. Well, where were they last year? Were they calling for $145 oil? No. It’s beyond somebody’s forecasting ability.”
He says something has to give, though. We’re already seeing demand destruction and high gas costs are taking a “tremendous” toll on the economy.
One other area that has Aitken talking is the wireless sector. Canada’s recent wireless spectrum auction might have been a good thing for consumers, but it wasn’t great for Bissett, which has a big stake in Rogers Communications (which owns Advisor.ca). “It’s a nice oligopoly right now,” he explains. “You’d like to preserve that, as opposed to having more competition.”
If there’s anything positive to take out of the auction, he says it is that the new entrants into the marketplace paid at least twice as much as they initially had planned. “If they’re really careful about economics, they have to be much more deliberate on capital investments to deploy the network and be more disciplined on the pricing front,” Aitken says.
Bissett isn’t planning to change its positions in Rogers or Telus, which it also owns, but Aitken knows he has to be open-minded — and not just in the wireless sector. “There are always new developments over time,” he says. “You can’t be unduly influenced by the short-term sentiment in the market, but you can’t be so proud that you don’t want to be proven wrong — come hell or high water, you avoid looking at new developments and just stick with an outdated view. You don’t want to do that.”
Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com
(07/28/08)