Why it's time to harvest gains

A Canadian portfolio manager outlines the reasons behind his firm’s decision to trim equity positions

Why it's time to harvest gains
Although eight out of the 11 S&P/TSX sectors posted a positive return in the second quarter, the Canadian equity market finished down 1.6%. The overall quarterly decline was mainly driven by the poor performance of the energy and materials sectors, the second and third largest sectors in the index.

For HSBC Global Asset Management Canada, the landscape in Q2 presented a good opportunity to harvest gains by trimming some Canadian equity positions.

“At this stage, we are neutral on equities in general compared to fixed income and we are slightly overweight cash,” explains Derek Massey, CFA, Head of Portfolio Management, Private Investment Management at HSBC Global Asset Management (Canada).

“We’ve taken our equity positions down a little bit across the board, in Canada, the U.S. and global markets. The second quarter offered a continuation of the trend seen in the first quarter. Looking from a valuation standpoint, at the beginning of the year the Canadian and U.S. markets were comparable with PE ratios north of 20.”

Massey and his team are currently in the process of doing some “bargain hunting” but is yet to pull the trigger and increase equity positions. They are in a period of re-evaluation after the Canadian market’s disappointing performance in the first half of the year.

“Financials within Canada have certainly piqued our interest at this point, and anytime you get a sector as beaten down as the energy sector is there is always the potential for opportunity,” Massey says. “The sentiment in energy is unbelievably negative. That gives us the opportunity to look at the sector and find the companies with the best balance sheets that can be sustained through this downturn, so that’s an area of interest now but we haven’t done anything specific there. “

With regards global assets, Massey remains neural the U.S. and sees more value overseas, throughout the Eurozone. “I think there are areas of opportunity throughout the U.S. but we’ve got to be cautious given the fact that this bull market has run for quite some time,” Massey says. “Valuations are getting a little pricey, especially in areas like technology, where some names are priced for perfection.”

Massey also feels that fading political risks in Europe have taken away some of the headwinds in the region. “The populist political movement that seemed to be taking hold has been tempered to a great extent,” he says. “As a result, valuations in Europe, Australasia and the Far East, the EAFE sector, are preferable to domestic and U.S. equities at this point in time.”

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