LOONIE TUNES
Why this week’s rally by the Canadian dollar is off key.
Many investors remain convinced that a correction is necessary, but North American stocks keep moving up after every pullback — a very bullish sign.
“The path of least resistance for equities appears to be higher,” said Alex Lane, portfolio manager at Dynamic Funds, who adds there is too much consensus around a correction, particularly since economic data is starting to re-accelerate around the world.
He also expects money that started to come out of the bond market in 2013 will eventually find its way into equities, serving as a major driver for the next leg up in a bull market that is still in its early stages.
However, his optimism also includes a more cautious stance on U.S. stocks. In the second half of 2014, equity investors went all in stateside, but so did fixed-income investors, causing the U.S. dollar to break out as currency investors followed.
Lane, who runs the Dynamic Power Global Navigator Class and other mandates for a total of roughly $3.9 billion in assets under management, said U.S. equities are struggling because they are readjusting to the huge gains in the greenback, which he points out is earnings negative. Meanwhile, the prospect of rate increases later in 2015 is restraining further multiple expansion.
Higher interest rates also pose a threat to several market segments such as RE ITs, utilities and consumer discretionary stocks. Dynamic is calling the market’s current be- haviour Taper Tantrum 2, drawing parallels between this year and the Taper Tantrum of 2013.
The good news, however, is that the tantrum period from May to December 2013 provides investors with a playbook for what to do, since every interest-rate-sensitive asset class had negative returns.
Lane also highlighted a recent report from Brian Belski, chief strategist at BMO Capital Markets, that reinforced the notion that growth stocks outperform when earnings growth is scarce. That group also happens to be cheap, trading at one of the biggest discounts to value in the past 23 years.
“There is a stealth bull market going on in growth equities,” Lane said, highlighting several names that play on this theme.
For example, Colt Group SA (COLT/LON), a European-based provider of application hosting, cloud services, data centres and other services, is a top five holding in the fund.
Fibre and data centre assets are becoming very valuable and strategic in this era of mobile and intense data uses, and Lane sees the consolidation that began in the U.S. telecom sector spreading to Europe.
“We actually think we’ve found another Level 3 Communications Inc.,” Lane said, highlighting a similar company that has been the fund’s largest position since inception.
The manager also stressed the importance of harnessing raw data and converting it into useful information that can be easily visualized as a key productivity driver over the next decade.
“This is what big data analytics is all about, and the best software companies in this space will become very valuable,” he said, highlighting his positions in Tableau Software Inc. (DATA/NYSE) and QLIK Technologies Inc. (GLIK/Nasdaq), both of which are expected to be acquired at some point down the road.
But QLIK is less well known, significantly cheaper and will benefit more from a European recovery due to its strong presence in the region. The company is also in the midst of its largest-ever product launch, which should accelerate top-line growth, and broaden adoption of its technology.
Lane also highlighted his position in Nomura Holdings Inc. (8604/ TYO), a financial services firm that is benefiting from higher capital markets activity in Japan as there is renewed global interest in the country due to the weaker yen and Prime Minister Shinzo Abe’s accommodative policies.
“There is an opportunity to reengage the Japanese to invest their savings and attract foreigners, which should drive volumes and deal flow,” Lane said.
Japanese companies are also starting to come around to Western views on return of capital to shareholders, and Nomura is no exception given its recent share buyback.
Although 70 per cent of Nomura’s total revenue is derived from the Asia-Pacific region, it also has a strong position in both the U.S. and Europe.
Lane noted that the company’s non-Japan operations have recently started to exceed expectations and will likely shift from being a drag on earnings to a contributor this year.