The banks aren’t so dangerous
Investors, determined to reduce their sensitivity to the emerging-market growth story and fearful of a repeat of the U.S. housing market crash, are shying away from both Canadian resource stocks and the banking sector.
Those trends may not reverse course any time soon, but the equity team at Aurion Capital Management is taking advantage of beaten-down valuations in unloved sectors and targeting cyclical names with limited exposure to developing economies.
“U.S. cyclicals don’t have that much exposure to global growth,” said robert Decker, who manages the Dynamic Aurion Canadian Equity Fund with Craig MacAdam and Gregory Taylor. “We like stocks that fall between the deep cyclicals and overly expensive defensives.”
In Canada, they are finding non-cyclical growth in names such as Bombardier Inc., CAE Inc., TransForce Inc., Valeant Pharmaceuticals International Inc., Magna International Inc. and even the Canadian airlines.
However, most of the best opportunities are popping up in the U.S. One source is the consumer discretionary sector, which has a high proportion of auto, retail and housing-related names.
U.S. financials are also benefiting from what Decker labels “de-synchronized” growth between Canada and the U.S.
“The recovery in the U.S. financial sector was delayed as they sorted through real estate inventories,” he said. “That’s virtually complete now, investment demand for real es- tate has accelerated, and large pools of capital are buying residential real estate in bulk in order to rent them back out again.”
Decker believes this has made U.S. banks much less dangerous than they used to be from a solvency and credit loss perspective.
MacAdam also highlighted the fund’s position in Tricon Capital Group Inc., a Canadian manager of U.S. real estate assets, as another way they are playing this theme.
As for fears related to the Canadian real estate market, Decker expects the housing slowdown will continue for another quarter or so.
“The banks are all incredibly cheap right now if you make the assumption that we’ll have a soft landing. By the fourth quarter, the banks should be good to go again and you’ll get some pretty significant outperformance in Canadian financials,” he said. “In the meantime, you’re getting paid to wait, so we hold them.”