Portfolio manager says volatility emerging from new reporting practices might spook the markets, but doesn't reflect company fundamentals
A volatile 2020 for Canadian financials might have some upside for investors willing to play the long game, according to one portfolio manager.
Chris Stuchberry, portfolio manager at Wellington-Altus Private Wealth, thinks that swings in Canadian bank shares driven by new accounting rules are actually an opportunity. He predicts a more volatile 2020 than the “near-perfect” market year that was 2019 but believes that volatility will be driven by a reporting change rather than an actual change in company fundamentals. If it is, it could be a good time to buy, but just be ready to ride a short-term rollercoaster.
“If you're an investor who is looking at long-term performance of your assets, there isn't that much of an incentive to react to volatility,” Stuchberry told WP. “It shouldn't really change your overall investing policy or investing premise.”
A recent report in The Globe and Mail highlighted how a new accounting standard, called IFRS 9, is requiring banks to report “expected losses” over the life of a loan. Actuaries have to use a complex system of predictive models to calculate where losses might come on loans that are still performing. With the new information included, bank reports look less rosy than they otherwise might, causing market anxiety and stock volatility. Stuchberry emphasized, though, that the different reporting doesn’t change the fundamentals of the company.
He noted that there’s a difference between what appears on paper and what can resonate back into the wider economy. Shifts in reporting are like looking at a company through GAAP accounting or IFRS. Just based on how you add up the numbers, the company might look different. But Stuchberry stressed that doesn’t mean that the company is different.
“Amazon is still Amazon. Facebook is still Facebook, Microsoft is still Microsoft,” Stuchberry explained. “It just changes the way we see them on paper.”
In the context of Canadian bank stocks, Stuchberry sees volatility as a chance to buy. 2020 may be a year when Canadian financials sell for less than they’re worth. If you can ride out the dips, they could be big winners.
Stuchberry isn’t changing his weighting of Canadian financials. He doesn’t think it’s worth going overweight but doesn’t think a significant underweighting is the sensible move either. He’s trusting that Canadian banks will keep playing dividends.
“As some of the stocks do show some weakness,” Stuchberry said “I think there's very good risk-reward when you factor in the cash flow over a longer-term time horizon.”