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AGF bullish on Canada as ‘washed out’ energy sector will rebound

Crude oil tanks at Kinder Morgan's terminal are seen in Sherwood Park, near Edmonton, in this file photo.


AGF Management Ltd., the asset management company that turned 60 in April, is bullish on Canadian stocks because it sees oil prices recovering, which would prop up what it says is an oversold energy sector.

"In our balanced accounts we're actually overweight Canada right now," Chief Investment Officer Kevin McCreadie, 56, said in an interview at Bloomberg's Toronto office Tuesday. "Certainly energy looks to be washed out here."

Central to the position is AGF's view that oil markets will return to a supply-demand balance later this year, boosting crude to as high as $60 in the first quarter of 2018 from $46 now. Canada's S&P/TSX Composite Index has eked out a gain of just 0.6 percent year-to-date -- dragged down by energy stocks -- the third-worst performance in the developed world after Israel and Australia.

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By contrast, the S&P 500 is up 8.7 per cent. Seven of the Canadian index's 10 worst-performing stocks are energy companies, which account for 20 per cent of the S&P/TSX.

"If you get back to balance, that'll help the stock market," Mr. McCreadie said.

Oil has rebounded about 75 per cent from last year's lows, boosting earnings in the first quarter. However, it's been tough to hold onto gains. Crude plunged 5.1 per cent Wednesday following U.S. data that showed the first increase in stockpiles in nine weeks. The TSX energy index is down 12 per cent year-to-date.

If the sector stabilizes, AGF, which had $36.4- billion in assets under management as of May 31, sees room opening up for the Bank of Canada to raise interest rates for the first time since 2010.

"You probably can get away with starting to normalize rates slowly in the back half of the year without damaging the housing market too much, but it has to be a slow and gradual process," McCreadie said.

AGF's call contrasts with a bearish view on Canadian stocks, including from activist investor Carson Block, who said last week a run on deposits at alternative mortgage lender Home Capital Group Inc. shows that "there could be some real problems with Canada."

Mr. McCreadie is less bullish on Canada's most important sector, financials, which account for a third of the benchmark index. Fears that hot housing markets in Toronto and Vancouver could suddenly cool have weighed on bank stocks, pushing the index down 1.3 per cent this year, but they still trade at double book value, he said.

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"Financials aren't cheap. They're well capitalized and you're paying for that," Mr. McCreadie said. "While stable, I don't think you're going to see great returns off them."

Slowing Redemptions

Other than Canada, AGF's funds are overweight the U.S. and Japan, while being underweight Europe and the rest of Asia. The company is also "pretty close" to reaching its target to get 60 percent of AGF's assets under management above the industry's median three-year performance.

AGF has struggled with net redemptions as investors across the industry have fled to cheaper exchange-traded funds. There are signs that trend is turning around, with outflows slowing in the quarter ended Feb. 28 to the lowest since 2007. AGF's shares are up 3.8 per cent in 2017 following last year's 21-per-cent gain.

"My guess is somewhere in the early part of first quarter next year, if performance stays where it is, we probably are back to a positive sustainable trend," Mr. McCreadie said.

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