Equities: Why invest now & which sectors?
CIBC Asset Management’s Colum McKinley and Natalie Taylor share insights on navigating current equity markets. Find out the historical context of the recent sell off and which businesses are expected to excel as the economy reopens.
Transcript - Equities: Why invest now & which sectors?
[Soft music plays]
[Still photo of Colum McKinley]
[Onscreen text: Colum McKinley CIO, Global Equities, CIBC Asset Management]
Colum: As a result of COVID, 2020 has been a period of incredible uncertainty on many fronts. In our personal lives, we've worried about loved ones and the threat of COVID; in our work lives, overnight, many of us began working from home. And unfortunately for a large part of the population, jobs were temporarily lost. And so COVID'S impact has been incredibly broad and yet intertwined with all of our daily lives. So it's not surprising that this has led to uncertainty and volatility in financial markets. And we've seen and experienced that periods of heightened uncertainty can create significant opportunities. If you think back to the opportunity that came as a result of post the global financial crisis, that was one of the best buying opportunities that investors faced for quite some time.
[A chart titled ‘Long-term investors see through crisis’, showing the stock market steadily rising from 2009 to 2019, in spite of a series of international incidents.]
Colum: And to navigate today's environment, we have a couple of thoughts or pieces of advice that we think that investors should be considering. The first is using the expertise of your advisor.
[Shot of an investment advisor talking with two clients, followed by another shot of an investment advisor talking with two clients.]
Colum: Today is an environment where working closely with a professional that has a deep understanding of your needs and investment goals, and the time horizon that you have for your investments, that they will be best able to position your wealth for success in the future.
[Shot of an investment advisor sitting at a desk, looking at charts and typing numbers into a calculator, followed by a shot of an investment advisor talking with two clients, followed by a shot of an investment advisor sitting at a desk looking at a chart and typing on a laptop, followed by a shot of a couple sitting in their living room, talking as they pour over papers and work on a laptop, followed by a professional sitting at his desk, working on his financial plan.]
Colum: And the second is, we think that this is an environment where investors should think about the long term. The economic and corporate data that's being reported today is both dark and bleak. But that's not what's going to drive future returns. Governments and businesses are starting to look to the return to normal, get back to their day-to-day activities and business as it once was.
[Timelapse shot of a busy super highway, followed by a timelapse shot of a busy downtown intersection, followed by a timelapse shot of a busy city street at night, followed by a timelapse shot of a busy shopping mall.]
Colum: Governments have injected significant stimulus into the financial system that's going to help us back onto the path of recovery.
[An aerial shot of Parliament Hill in Ottawa, followed by an aerial shot looking up at the major skyscrapers in Toronto’s financial district, followed by a timelapse shot of a busy waterfront walkway with a beautiful, tree-filled park behind it.]
Colum: And we've seen again in the past that these types of environments create great opportunities for investors. If you think about post the global financial crisis, that was the longest bull market that investors had experienced in the history of investing. And even through that period there was incredible uncertainty. We faced natural disasters. We faced government shutdowns. We faced elections with uncertain outcomes and implications for economies and financial markets. And so what's really important is to focus on businesses that can navigate these periods of time. And so that's one of the key things that we have been focusing on, is in embedding our long term focusing in portfolios, is by focusing on the highest quality businesses. So we're looking for companies with strong liquidity and access to capital.
[A slide showing the logos of various fiscally strong companies, including CIBC, CP, Brookfield, BCE, Apple, RBC, TD Bank, Merck, Telus, Procter & Gamble, Starbucks, Microsoft and Magna.]
Colum: Businesses led by experienced and capable management teams that are positioned to take advantage of the uncertainty that we're seeing today. We're focusing on companies that have attractive dividends. They're generating strong cash flows. They're able to maintain those cash flows through this uncertainty. I think it's one of the things that's quite interesting about this environment. You can quite easily construct a portfolio with dividend yields of 4.5%, 5% or higher in some of the highest quality businesses in the Canadian marketplace. And if you think about long term returns, long term equity returns in the high single digits, if we can build portfolios with mid-single digit dividend yields, that's almost half of your future returns already locked in in the form of a cash flow. So we think that focusing on high quality businesses that have the capability to thrive and survive through this environment will be the key to success. I'm going to pass things over to Natalie now to focus on some of the areas that we're seeing specific opportunities.
[Still photo of Natalie Taylor.]
[Onscreen text: Natalie Taylor, Portfolio Manager, North American Equities, CIBC Asset Management]
Natalie: Thanks, Colum. So I wanted to start off just highlighting some of the obvious outperformers and underperformers in the COVID health crisis. So as you can see on the slide, some of the bigger winners include tech, biotech, e-commerce, as well as streaming services.
[A chart titled ‘COVID Outperformers vs. Underperformers’, showing companies/sectors that have performed well during the COVID crisis (Netflix, Amazon, software, biotech) and companies/sectors that haven’t performed well (autos, retail REITs, hotels, retailers, airlines).]
Natalie: And we think that the benefits that they're enjoying are largely reflected in current valuations. On the flip side, stocks that have underperformed in this environment include leisure and travel, airlines, retail and real estate with retail tenants. And we think these sectors will take a bit longer to recover and there is significant uncertainty and as such we also think that current valuations largely reflect that situation currently. So where are we finding opportunities? One sector that we think is attractive currently is restaurants and in particular, quick service restaurants. Generally, these businesses have attractive business models that are capital light and franchised and are relatively defensive in the product that they sell, being food.
[A chart titled ‘Restaurant sales recovering’, showing that quick service restaurants suffered somewhat in late-March/early-April 2020, but have been recovering since then, while casual dining restaurants, over that same timeframe, were hit very hard initially, and have since made minor recoveries.]
Natalie: It's also been one of the hardest hit sectors in the COVID lockdown, and the valuations reflect that. So typically restaurants will do sales of 3% to 5% in a normal environment, and that has reversed quite sharply and down 30% to 50% for quick service and down as much as 80% to 90% for casual dining. We're seeing trends of stabilization throughout April, and that's largely due to the restaurants' ability to adapt and leverage their drive-through and delivery capabilities and also some return of customer demand. We think that sales are likely to accelerate further as economies start to reopen. The second sector is the auto-related sector. So globally, there's been a significant decline in miles driven in the range of 40% to 50% as employees are working from home and staying close to home.
[A chart titled ‘Driving Mobility Recovering’, showing how methods of transportation have changed in the US since the COVID crisis began. Driving has declined -30%, walking -44%, and transit -75%.]
Natalie: Similar to restaurant sales growth, we've seen an improvement throughout the month of April. And we think that once economies reopen, travel by car will be the preferred form of transport in order to maintain social distancing. We think fuel stations, auto repair shops, fleet managers are likely to see near-term benefits from these trends, while oil companies and auto companies may benefit over the longer term - however, in the near-term, they're experiencing supply issues that need to be worked out. Lastly, I wanted to touch on the gold sector. We believe that gold can continue to rally similar to what we've seen in the global financial crisis.
[A chart titled ‘Gold Equities Trading at a 5% Discount to Spot’, showing that gold is a good investment during periods of capital and operating issues.]
Natalie: And that's really because of the unprecedented amounts of stimulus that we're seeing today. And also the potential for more stimulus to come as gaps in the recovery are identified. If the recovery in the economy is swifter than expected, the stimulus could lead to inflation in the fullness of time, and gold is a good hedge in an inflationary environment. Lastly, as you can see on the slide, the equities are not currently reflecting the current spot price of gold and are trading at about a 5% discount. We believe that over time the gold price remains high at these levels and that as operations resume, that that discount can narrow. I should also mention that the environment that we're in currently is very dynamic and we are monitoring signposts and developments and trying to manage risk as best as we can, and the opportunities that we're seeing are constantly evolving.
[Soft music plays]
[The views expressed in this video are the personal views of Colum McKinley and Natalie Taylor and should not be taken as the views of CIBC Asset Management Inc. This video is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this document should consult with his or her advisor. All opinions and estimates expressed in this video are as of the date of publication unless otherwise indicated, and are subject to change.
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