Equities outlook positive despite Delta spread

Concerns are rising yet again about Covid-19, and it’s primarily because of the Delta variant.

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However, with respect to equities, Craig Jerusalim, senior portfolio manager at CIBC Asset Management, said his outlook remains the same. 

“Delta has definitely been adding to some of the fear factor and market uncertainty, which is never good for equities, especially when markets are trading at or above their long-term valuation,” said Jerusalim. 

But he’s still calling for continued growth in equity markets as the economy slowly reopens, largely because “we’ve seen the playbook before.”

“The downside cases [are] known, and, more importantly, corporations, central banks and governments know how to react and stimulate when and where needed,” Jerusalim said. 

Both the S&P 500 and the S&P/TSX Composite are up about 20% this year. A report from FTSE-Russell described a resumption in August of the global risk rally, with most equity markets rising and many hitting all-time highs, while high-yield bonds outperformed investment-grade and government debt.

The TSX is trading only about one multiple turn higher than its long-term average, Jerusalim said, while the S&P 500, at 20 times forward earnings, is still more than three multiples higher than its long-term average.

The major U.S. index has registered more than 50 all-time highs so far this year, according to a report from BMO Economics, which has happened in only six other years.

Jerusalim, who manages the CIBC Canadian Dividend Growth Fund, said companies with a “high quality philosophy” don’t fall in and out of favour often. He said he sees more potential in energy and financials relative to materials, as Delta could have a greater impact on Chinese demand than previous waves. 

Notably, Intact Financial, Brookfield Infrastructure and Canadian Apartment REITs are “well positioned to weather almost any economic environment that Covid or any other unexpected events can throw at them at any time,” he said.

The same goes for Canadian Natural Resources Ltd. and Tourmaline on the resource side, as Jerusalim said he expects West Texas Intermediate to trade around $60 or $70 per barrel, allowing those oil companies to pay down debt, increase dividends and grow their production share.

But while equities markets ended the summer on a high note, Jerusalim issued a warning for back-to-school season.

Some of the “reopening optimism” could be delayed until vaccines are approved for children under 12. “It’s just a matter of time before those breakthroughs occur and, once that happens, I think we will ultimately be able to get past this Covid period,” Jerusalim said.

However, that may not happen until next year, he said.

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