All that glitters
Aurion Capital managers expect an earnings turnaround on gold.
The equity team at Aurion Capital Management expects an earnings recalibration for North American companies as a result of weaker oil prices and the strong U.S. dollar, but that doesn’t mean they’re sitting on the sidelines.
One area they’ve been adding exposure to since early December is the gold sector, partly as a play on the metal’s seasonal rally, but also in anticipation of positive earnings revisions.
“For the first time in a number of years, these companies are going to start showing better operating metrics,” said portfolio manager Greg Taylor, who runs the Dynamic Aurion Canadian Equity Fund and the Aurion II Equity Fund with comanagers Bob Decker, Craig MacAdam and Mike Archibald.
In addition to getting the cost-cutting message, Taylor noted that the lower Canadian dollar and declining oil prices provide an additional boost for certain gold companies.
As a result, the managers have taken their gold exposure up to 10% of the portfolio, taking the money out of oil companies, which are now a significant underweight.
Decker believes gold’s strength is a reflection of increased volatility and uncertainty in currency markets. “It’s actually a non-correlated ‘duress asset,’ which means it’s a good diversifier for portfolios to have in times of uncertainty, and that uncertainty is now at the highest level in three years,” he said.
The managers also believe the negative aspects of the strong U.S. dollar are not widely appreciated yet and the U.S. economic recovery, despite improving U.S. consumer and the U.S. housing markets, is not happening nearly as quickly as many expected. As a result, the managers anticipate negative earnings revisions in both Canada and the U.S., which will keep investors in defensive, low-beta and high-yielding assets. However, they do anticipate a reversion trade sometime around the end of the first quarter.
One sector the managers are growing increasingly cautious on is Canadian financials, particularly the banks. With the Bank of Canada expecting a slowdown, they anticipate an uptick in loan losses from oil-sensitive regions and slowing loan growth overall. “It makes us a bit nervous in terms of what the growth profiles for the banks look like going forward,” Archibald said, noting that Aurion is underweight Canadian banks in all accounts.