Time to look south of the bor­der

U.S. in­vest­ments, es­pe­cially banks, of­fer in­creas­ing po­ten­tial

Ottawa Citizen - - FINANCIAL POST - Fi­nan­cial Post jrat­ner@na­tion­al­post.com

Im­prov­ing growth in the United States, low in­fla­tion and very friendly cen­tral bankers around the world have Monika Sk­iba feel­ing op­ti­mistic about eq­ui­ties, par­tic­u­larly Amer­i­can stocks.

The port­fo­lio man­ager re­cently raised the Man­ulife Cana­dian Stock Fund’s U.S. ex­po­sure to 25%. And while she un­der­weights Cana­dian banks as a group, she prefers the ones that have more ex­po­sure out­side Canada — namely Toronto-Do­min­ion Bank, Bank of Nova Sco­tia and Bank of Mon­treal.

“Cana­dian banks are very well run and have very solid cap­i­tal po­si­tions, but they’re chal­lenged for growth go­ing for­ward,” she said. “We have slow­ing real es­tate sales, lower af­ford­abil­ity and ex­traor­di­nar­ily high lev­els of debt.”

Sk­iba ex­pects loan growth at Cana­dian banks will be strong on the cor­po­rate side if the U.S. econ­omy con­tin­ues to gain trac­tion, but she doesn’t think it will be suf­fi­cient to off­set very slug­gish con­sumer lend­ing.

U.S. banks, on the other hand, are ben­e­fit­ing from a sta­bi­liz­ing hous­ing mar­ket, which is good for em­ploy­ment growth and ex­tremely im­por­tant for the bal­ance sheets of both banks and con­sumers.

“Af­ter sev­eral years of dis­ap­point­ing per­for­mance, the fun­da­men­tals for U. S. bank stocks have fi­nally im­proved,” Sk­iba said. “More sta­ble hous­ing prices means the banks will have less loan im­pair­ments and will not have to take loan write-offs to the ex­tent that they did in the past few years.”

While the man­ager uses tra­di­tional val­u­a­tion met­rics for the bank­ing sec­tor, she re­lies on her own mea­sures when look­ing else­where. For ex­am­ple, she trans­lates fi­nan­cial state­ments into di­rect cash flow or “eco­nomic earn­ings” by re­mov­ing all ac­count­ing as­sump­tions that dis­tort earn­ings and then uses free cash flow yield to value com­pa­nies in­stead of a P/E ra­tio.

“It truly shows whether they al­lo­cate cap­i­tal prop­erly and if they have pric­ing power,” Sk­iba said. “It is a nu­meric ex­pres­sion of com­pet­i­tive po­si­tion, be­cause buy­ing mar­ket share does not trans­late into a good in­vest­ment.”


Port­fo­lio man­ager Monika Sk­iba re­cently raised the Man­ulife Cana­dian Stock Fund’s U.S. ex­po­sure to 25%.

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