Finding opportunities in a recession

While investors in Canadian equities can expect more volatility this year, cheaper valuations — for banks, in particular — offer room to run, a portfolio manager says.

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CIBC senior portfolio manager Colum McKinley’s optimistic outlook is based on the valuation disparity between Canadian and U.S. equities. While the S&P/TSX Composite index has lagged behind the U.S. market’s strong rebound this year, there is an opportunity for Canadian businesses to bridge this gap, he said.

“We are seeing many opportunities in Canadian equities to deploy capital into what we think are some of the highest quality businesses at very, very attractive prices,” he said.

One area is Canadian banks, McKinley said, which are down about 16% for the one-year period to May 31. While the sector has faced challenges from higher taxes, increased capital requirements and the U.S. regional banking crisis, McKinley said valuations are attractive. The banks’ average price-to-earnings ratio of 9.5 is below its long-term average of 10.7, he said, and the price-to-book ratio of 1.3 compares to a long-term average of 1.7.

Despite recent underperformance, he said Canadian banks have provided a compound annual growth rate of 9.8% over the past decade. Additionally, the average dividend yields of Canadian banks stood at a strong 5.2%, he said.

“Every time we can take advantage of that short-term volatility in the marketplace, it works to our advantage as investors,” he said.

One area that currently presents risks is office real estate, McKinley said. The shift toward remote and hybrid work has resulted in businesses reassessing their needs, which could impact landlords and their cash flows, McKinley said, and the implications could take time to play out.

He offered three tips for recession-proofing portfolios. First, invest in high-quality companies that have proven their ability to navigate uncertainty and take advantage of recessions. Second, avoid highly leveraged businesses, which can face significant challenges during an economic slowdown. Finally, think long term and capitalize on opportunities where good businesses can be purchased at attractive prices.

“Recessions will come and go,” he said. “For investors with a long-term investment horizon, they can create opportunities.

Maddie Johnson

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