August 18, 2017

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Another year of investing dangerously?

Not much to be bullish about for 2016; then again, it's not an entirely bearish outlook, either

Hey there, time traveller!
This article was published 9/1/2016 (587 days ago), so information in it may no longer be current.

This past year has been tough for Canadian investors. Thankfully, it hasn't been as rough as some in recent memory (2008 comes to mind). But after several years of positive returns in the equity markets -- at least on the TSX -- it comes as a shock to the stock-market investor mindset to finish 2015 in the dumpers.

And by no means can we expect 2016 to be much more impressive. It has certainly started poorly with fears about China's slowing economy knocking markets around the globe down this week.

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Yet, the investment outlook for this year isn't altogether bad, at least for Canada. That's because much of the pain -- the precipitous drop in oil prices -- has already been felt.

At least that's the hope for investors, says Craig Jerusalim, a Canadian equity portfolio manager with CIBC Asset Management.

"As poorly as energy stocks did in 2015, the commodity price did even worse, so now the bigger question for 2016 is not where the commodity price goes, but rather how the stocks react to its movement."

A bottom-up investor, Jerusalim says the current volatile and somewhat downward-trending Canadian stock market presents opportunity, provided investors stick to firms with good financial and market positions.

"You want to buy the companies that will become the buyers of assets and avoid the ones that are going to be forced to be sellers of assets," he says.

Some that come to mind are Suncor, Canadian Natural Resources and Arc Resources, he notes.

These are firms that don't carry a lot of debt, have low cost of production for a barrel of oil and management teams with good track records.

They're going to be able to weather the low prices and actually improve their position in the market by snapping up assets from companies that have higher production costs and need to reduce their debt loads.

And oil will eventually recover. The question is whether it will be this year or next year or the year after that, says Garey Aitken, chief investment officer at Franklin Bissett Investment Management.

"But what we're seeing is a real aberration, because global economic growth will get back on track," he says.

While an oversupply of oil -- in no small part because OPEC will not cut back on production -- has battered Canada's energy-heavy economy, it helps other economies, especially the U.S., continue to gain ground because costs are lower for everything that requires oil -- and that's a lot of stuff.

"We see better opportunities and better times ahead for weaker sectors, and that will be a function of higher commodity prices, and that's going to come about through better economic growth," Aitken says.

And there's an old adage when it comes to commodities: the cure for low prices is low prices. As cheap oil facilitates more spending elsewhere, the economy heats up and, in turn, creates more demand for oil.

At the same time because of low oil prices, energy firms reduce production, leading to less supply just as more demand for the commodity resumes.

Yet, there's more to the market woes than the low price of oil and other commodities that Canada produces in spades. Investors leery of buying into the market have good reason to be, says Hardev Bains, a portfolio manager and president of Lionridge Capital in Winnipeg.

"I'm not generally bullish on the overall markets, looking out over 2016, and I believe markets are overvalued, and the right kind of catalyst can bring them down," he says. "This could be some combination of global economic issues combined with the inability of governments to further stimulate economies with further financial measures designed to encourage borrowing and provide liquidity."

Part of what has been fuelling overvaluation -- at least more than is warranted by the real economy -- are low interest rates and low bond yields. Both serve to drive investors to equities to seek returns on their money that outpace inflation.

"That said, there are pockets of opportunity in the equity markets for investors to build wealth over a long-term horizon," Bains says.

Unlike mutual fund managers, as a private portfolio manager, Bains has the option to have more cash on the sidelines, and has done that over the last couple of years after some opportunistic selling, he says. The problem, however, is that finding companies to buy at a reasonable price has been "few and far between."

As the year progresses, however, we will get a better indication of whether the U.S. economy will continue to gain ground, and in turn, bring everyone else up along with it. And at some point, prudent investors will find their bargains before bearish gloom starts turning back toward bullish exuberance.

Those markets that are among the most down-and-out -- ahem, Canada's TSX -- are likely to be the most fertile grounds for an upside.

"Sometimes the best opportunities are found when sentiment turns negative like it has in this particular environment," Aitken says.

"We think corporate Canada is healthy, and there are many great businesses here, even though some of them have been under cyclical weakness."

joelschles@gmail.com

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