Length 4:17

Volatility Viewpoint – Canadian Equities

Colum McKinley
Vice President, Canadian Equities,
CIBC Asset Management
“When we think about the political landscape in the United States, there are significant, sweeping changes that are unfolding. And these will have a dramatic effect on future earnings and cash flows for companies. We want to contemplate what that means for those future earnings, as we get more information about what the policies actually are. The risk for investors today is there is going to be a lot of speculation about potentially what policies could look like. As new information comes to the market, as the market reacts to those policy choices, we are going to look at how that is reflected in stock prices, and how we can take advantage of that. The second change that’s unfolding in the market is improvements in the economy. Since the financial crisis in the United States, interest rates remain quite low, stimulus quite high, and yet that has created a very sluggish, drawn out economic recovery. One of the things that has been changing over the last 3 to 6 months is we are seeing clearer signs that economic growth is accelerating. We are seeing it in the economic data that is being released, we are always seeing and hearing it in the conversations that we are having with management teams. And management teams are becoming more optimistic about their business, and future growth, and future cash flows, and future earnings. That’s one of things that is driving higher stock prices. But as long as we continue to have improvement in earnings, we think that is going to be a very supportive backdrop for individual stocks and sectors to perform quite well in today’s environment.”

Impact on Canadian equities
“In Canada we have many of those same themes coming to bear. We have also had commodity prices that over the last 6 to 9 months have really firmed up. We’ve seen oil prices move higher, copper prices, gold prices, and so that is supportive for many of the sectors in the Canadian stock market. And it is also very supportive for the Canadian economy. When you think about a higher energy price and what that means for Western Canada, and economic growth in Western Canada, the sentiment and the outlook has changed quite dramatically from where it was a year ago. And so we think the improvements we’re seeing in the global economy will help pull Canada along. We are looking for businesses, and we are invested in businesses, that will benefit from many of these trends. We hold what we think are some of the best energy companies in the Canadian marketplace. We own companies like CN Rail and CP which are railroad companies, very economically sensitive companies, that as the economy improves, as the outlook gets better, their underlying business will exceed investors’ expectations.”

Using volatility to our advantage
“As investors, going through volatility, it’s never a great experience, but as long-term investors we actually embrace volatility. We look at that as creating some wonderful opportunities. If we think about some great companies,  long-term businesses, and think about their business over, not the next quarter, but over the next 3, 4, 5, 10 years, when we have stock market volatility, when markets overreact to short-term trends, short-term themes, that is an opportunity for us to buy more of a great business at a more attractive price. And so volatility, in a perverse way, as a value investor volatility is something we actually look forward to. In today’s environment, with a backdrop of improving economic growth, improving commodity prices, improving outlook on earnings, if we do experience volatility, and we think there will be volatility in 2017, that price volatility is something that we are going to use to our advantage.”