The sheer scale of the U.S. economy means that any moves up or down create inevitable ripples. With the U.S economy performing well, a general broadening of growth is occurring and, as a result, there are improved consensus estimates in Japan, Canada and Europe. The economic improvement is resulting in some impressive earnings results in places that have struggled for a long time, in particular Europe and emerging markets.
“The places we like are the ones that are not hitting new highs, like emerging markets, which is still 30% below its pre financial crisis high. Or Japan, which is still half way below where it was in the early 1990s,” says BlackRock’s chief investment strategist for Canada, Kurt Reiman. “These are markets that are still trading at a pretty deep discount to developed North America and the U.S. in particular. These value signals really matter and we are more positive about finding some returns in those areas.”
Although he’s highlighting emerging markets and Europe as particular areas of opportunity, Reiman isn’t ruling out the chance of the U.S. and Canadian markets moving higher. He just thinks that this year could be a little bit rough with more limited upside in North America. “Our structural view is that investors need to look overseas because of the high concentration on energy, financials and materials here in Canada,” Reiman says.
“Unless you are really bullish on commodities, it’s hard to get enthusiastic about having too much exposure, although it may be fine this year. We’re talking about a possible oil price of mid 60s and commodities in general look like doing pretty well. In that sense, Canada is quite well placed to take advantage of this reflation trade.”
From an asset allocation perspective, Reiman likes the global healthcare and financials sectors and is targeting banks that represent better value than Canada’s big six. Reiman does see U.S. banks as being a good investment in the current environment. “If investors want some benefit from improved lending, better fees on asset management and underwriting, they are better off going for a U.S. bank rather than a Canadian bank, which may have 30% revenue exposure coming from the U.S. anyway,” Reiman says. “Financials tend to be overrepresented in the TSX relative to the broad market cap, but healthcare is underrepresented.”
Technology is another sector that Reiman is favouring and he thinks investors may have to look overseas to the U.S., Japan or Europe to get that exposure because, like healthcare, it’s underrepresented here in Canada. “Technology and healthcare are sectors that have good pricing power,” Reiman says. “With that in mind, we’ve been speaking to our clients about the importance of focusing on growth and dividend, as opposed to the outright dividend yield.”
Portfolio manager: Why I like market volatility
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