A series highlighting news and trends in international business that matter to investors looking for opportunities outside of Canada.
The year began with a dismal performance by world stock markets. From Tokyo to Toronto, equities have been punished as commodity prices plunge and doubts grow about the health of the global economy. The losses are being felt by individual investors as well as institutional money managers. And while this latter group acknowledges the difficult environment, they aren't about to throw in the towel for this year.
Many money managers are still positive on the global economic situation. And they are still finding stocks worth buying – especially with the recent price dips for many equities.
One sector currently favoured by many professional money managers is financials. Broadly defined, that includes banks, insurance companies and investment firms.
One advantage of the financials sector is it trades at a lower price than the wider market. The price-earnings ratio of the MSCI World Financials index has traded at a discount to the wider market for about the past four years. That makes it less vulnerable when markets drop – and attractive to investors looking for value.
Here are market outlooks for 2016 from three money managers with an international perspective, why they like financials, and some of their top picks in the sector.
Chief investment officer and portfolio manager
Norrep Capital Management Ltd.
Norrep is a global investment manager with offices in Calgary and Toronto.
Mr. Millar leads the firm's investment management group, and specializes in global equities.
"I try not to make predictions on the markets. I instead prefer to focus on the fundamental backdrop, which to me still looks constructive," says Mr. Millar. He notes forecasts call for real GDP growth to accelerate on a global basis in 2016, while valuations are reasonable, particularly in Europe. He adds the fundamental backdrop for global equities still looks attractive.
Mr. Millar says the biggest weighting in his firm's global funds is financials. He feels the sector is inexpensively valued, and will benefit from rising interest rates. He finds U.S. bank stocks attractive because of the rising interest-rate environment and as a way to participate in the strong U.S. economy. In Europe, he says banks are attractive because of the improving return on equity, and they will benefit from the improving economy.
One specific company he likes in the sector is San Francisco-based First Republic Bank. It caters to high-net-worth customers, and has significant exposure to the wealth creation occurring in Silicon Valley. It grows 2 to 3 times as fast as its U.S. banking peers, and recently surpassed $50-billion (U.S.) in assets.
Chief capital markets strategist and senior portfolio manager
Caldwell Investment Management Ltd.
Caldwell provides investment management and advisory services to retail and institutional investors. It is based in Toronto.
While there are many cross-currents at play in the world, Dr. Thorne expects slow but steady global economic growth this year. He is convinced interest rates are going to increase in the United States faster than expected. "This needs to get priced into the market, and, as it does, the U.S. dollar will appreciate," he says.
Dr. Thorne expects to see "one last sell-off" in commodity prices before they recover – but he does not expect this to be the beginning of a new commodities super-cycle. In equities, he expects value stocks to outperform growth. Regionally, he is most positive on the United States, Europe and Canada. He says the performance of stocks will be more dependent on the characteristics of individual companies, but one of the sectors he views positively is financials.
Dr. Thorne favours a very specific segment of the financial sector called business development companies (BDCs). These companies were developed in the 1980s to loan to small and medium-sized businesses. Dr. Thorne says strong players are moving into the space, and the companies may soon be permitted to have additional leverage – that is, loan out a multiple of their current assets, like traditional banks. "This sector is completely misunderstood," Dr. Thorne says. Two of his top picks in the segment are Goldman Sachs BDC Inc. and BlackRock Capital Investment Corp.
Managing director and senior portfolio manager
Middlefield creates and manages investment products for individual and institutional investors. It is based in Toronto, with offices in Calgary and outside of Canada.
One of Mr. Nasr's mandates is the Global Dividend Growers mutual fund. He is forecasting modest global economic growth of about 3 per cent this year, with developed markets remaining steady and emerging markets stabilizing after two difficult years. He notes global growth remains constrained by demographics, debt and disinflation. He expects additional monetary stimulus out of Europe, China and possibly Japan, while he's doubtful the United States will raise rates as many times this year as some expect. As far as equities go, he favours developed markets such as the United States, Europe and Canada.
Financials are one of the sectors most preferred by Mr. Nasr. He believes these companies will benefit from loan growth, expense reduction and rising interest rates. One of his top picks in the sector is Bank of America. He says the company has a large deposit base and should be one of the biggest beneficiaries of rising interest rates in the United States. He expects earnings per share to increase because of a combination of loan growth, higher fees and lower expenses. He sees earnings growth and multiple expansion causing its shares to rise several dollars to $20 apiece.