Are Canadian equities the place to be?

With equities fuelled by energy and materials, and with consumers and financials having room to run, Canada is the place to be going forward, according to Derek Massey, head of portfolio management for HSBC GAM Canada.

“The overweight Canada angle is something that we've been positioning for the past couple of years, it's worked, and we see nothing on the horizon to change that,” Massey says. “Particularly for Canadian investors there's ample opportunity in the Canadian equity markets to do well when you look at a global picture and valuations in Canada. In a challenging, dynamic, and volatile market, active management really paid off.”

Massey’s team runs a Canadian core strategy for private clients on their discretionary platform and a Canadian dividends strategy for the discretionary business as well, and both of those strategies produced positive returns last year when equity markets were down. You almost have to look at what's hurting you in the pocketbook as great places to be investing, Massey notes, pointing to food inflation as an example.

Although one of the main pain points for consumers over the last year, owning companies like Loblaws and Metro have been fantastic — and both of those names are quite prevalent in HSBC’s strategies. Filling up at the pump has also been a difficult proposition because of higher gas prices, but the energy space has been a fantastic winner for investors.

As for their multi-asset portfolios, they’re currently neutral US equities and underweight European equities, with the plan to maintain that weighting, and when it comes to fixed income they’re starting to slowly increase duration. The old acronym “TINA,” There Is No Alternative, has changed to “TARA,” There’s A Reasonable Alternative, Massey notes.

“As the central banks continue to increase interest rates, you’re getting yields out of bonds again and they aren’t as expensive as they were before. We're still underweight bonds, but slowly increasing the duration of those bonds to capture those higher yields further out on the interest rate curve.”

Coming to an end of the interest rate cycle bodes well for the banking industry and with the Canadian equity market heavily weighted towards the banks, it's another sector Massey is keen on. Because the stocks have come down quite sharply in the last year, he’s seeing dividends north of 4% and he would “much rather own a Canadian bank with a 4% yield than buy a GIC at 4% interest, not only because of the tax benefit but the long-term nature of actually owning equities and seeing the capital appreciation of stocks.”

Despite the fact that Canadian markets have been relative outperformers globally they’re still cheaper than the global equities and with rates staying sticky and supply chains slowly coming back with the COVID lock down in China changing, “we believe the space we’ve concentrated on to take advantage of the energy complex, materials, and consumers is the place to be in this inflationary environment.” And though he forecasts recessions are baked in for most economies globally, Canada’s should be fairly shallow as the fundamental building blocks of the economy lessen the blow.

“We've already seen the pullback in a number of sectors and the sectors that are doing well should continue to do well,” Massey says. “For all the difficulty of last year, our investment team has shown that active management does well for our clients and we're pleased to produce the types of returns we have. We’re really happy with our positioning going forward: we’re in a sweet spot now.”