A favourable environment for Canadian equities

Slower economic growth, stubbornly high inflation and rising interest rates indicate a recession may be near, but Canadian equities retain certain advantages, a CIBC portfolio manager says. 

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“Canadian equities have a very positive setup right now given what’s going on in the world,” said Greg Zdzienicki, portfolio manager with CIBC Asset Management.

Canadian equities should benefit from high energy prices, attractive valuations and relative economic stability, he said. Valuations are “at trough levels,” he said, with stocks much cheaper than in the U.S.

Zdzienicki said he has a positive view on energy and financials. Within the latter, he favours property and casualty insurance companies followed by non-bank financials. Banks are currently trading at a discounted rate, Zdzienicki said, so although the sector would be his third pick within financials, he’s currently overweight most banks across value strategies.

“They’re stable dividend growers, generating a ton of cash flow, and trading at a discount to their long-term intrinsic value,” he said.

Zdzienicki said he has shifted from an underweight in energy a couple of years ago to an overweight or a least market-weight position. Companies with strong management teams, low costs and good balance sheets are the most attractive, namely Cenovus Energy within the oil sector and Tourmaline Oil and ARC Resources Ltd. within gas. 

Comparing Canadian energy to other parts of the world, Zdzienicki said Canada has a stronger commitment to ESG and carbon emission reduction, as well as assets with long operating lives. The Canadian energy sector is “not dirty carbon,” he said. In fact, he said Canada’s energy sector is one of the cleanest.

Another reason he likes Canadian energy is that companies cut dividends and preserved cash when energy prices went down. As prices go up, “these companies are in a very positive position to return cash to shareholders going forward,” Zdzienicki said. 

Conversely, areas that have long-dated cash flows, like technology, could be riskier as interest rates rise. Consumers also have less purchasing power in an inflationary environment, which could have an impact on technology. 

With the future of the economy still very uncertain, Zdzienicki recommends managed solutions because of their ability to give a diversified exposure to various asset classes and sectors. In terms of specific companies, he said to look for names with competitive advantages that are able to pass off price increases as rates continue to rise. 

Historically, stocks have been a good hedge against inflation as cash flows are typically tied to rising prices, Zdzienicki said. Sectors like materials and energy can also offer a hedge because the price paid for a resource or a commodity often increases with inflation. 

Another thing to look at in this environment is dividends, Zdzienicki said, which were largely ignored in the recent bull run. They could start to matter again given the current economic uncertainty.

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.