Time to look south of the border
U.S. investments, especially banks, offer increasing potential
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%.