Investors should buy Canadian banks and insurers as companies such as Manulife Financial Corp. benefit from beefed up wealth-management activity and a switch from bonds to other assets, according to BMO Capital Markets.
While Canadian equities will underperform U.S. markets again this year as demand for commodities from emerging markets continues to lag, banks and insurers will outperform, Brian Belski, chief investment strategist at the Bank of Montreal unit, said yesterday in an interview at Bloomberg’s Toronto office.
“This is not about the great rotation into stocks,” said Belski, who splits his time between New York and Toronto. “It’s about the great rotation out of bonds. Who benefits from that? Life insurance companies because of the asset management business.”
Canadian bank returns have been almost triple that of the insurers in the past five years. The Standard & Poor’s/TSX Banks Index gained 139 percent in the five years through yesterday, while the Standard & Poor’s/TSX Life and Health Insurance Index gained 42 percent. Since the start of 2013, the life insurers have made up some ground, gaining 48 percent as Canadian lenders including Toronto-Dominion Bank rose 18 percent.
Insurance companies have “massively restructured” in the last few years, Belski said. “Many of them have gobbled up asset management businesses,” he said, putting them in a position to grow as U.S. equities continue on a 15- to 20-year bull market.
Manulife, Intact Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. are among Belski’s insurance recommendations. Royal Bank of Canada, Toronto-Dominion and Bank of Montreal are among his bank picks.
Toronto-based Manulife’s wealth product sales climbed 34 percent in the third quarter of 2013 from the year-ago period to C$11.3 billion ($10.2 billion). Sun Life, the country’s third-largest insurer by assets, also gained from wealth sales.
Insurers have prioritized their wealth management operations in a bid to capture profit from sales and premiums. Manulife relied on its wealth operations for about 35 percent of profit last year and that will reach 40 percent by 2016. The firm’s Boston-based John Hancock unit reached a deal to acquire broker-dealer Symetra Financial Corp. in June and it bought investment adviser Wellington West Financial Services Inc. from National Bank of Canada in August.
The Canadian S&P/TSX Composite Index has underperformed the S&P 500 Index U.S. equity market in the past three years as sagging gold prices and an oil bottleneck dragged down the resource-heavy market. Belski has a year-end target 13,575 for the S&P/TSX, the lowest among six strategists surveyed by Bloomberg. The market closed yesterday at 13,988.20
Canadian industrial companies, including engineering firm SNC-Lavalin Group Inc. and railroads Canadian National Railway Co. and Canadian Pacific Railway Ltd. are set to benefit from a renaissance in U.S. manufacturing, Belski said.
There are far fewer railroads in Canada today than there were in 1900, he said. The U.S. economy will need oil, gas and raw materials as manufacturing recovers, he said.
“How are you going to get it there? You going to UPS it? Railroads,” he said.
Even if TransCanada Corp.’s Keystone XL oil pipeline gets approved, there will still be demand for railroads, Belski said.
“If there’s any kind of near-term downside because the pipeline gets turned on, and it potentially takes away volume from the rails, I think that’s a buy opportunity,” he said.
The pipe, which would transport Canadian crude to refineries and ports in the U.S., was originally proposed in 2008. Canadian officials are pressing the Obama administration to make a decision on whether to approve the pipeline.
The lower Canadian dollar, which has fallen 4.3 percent this year against the U.S. dollar, will boost industrials too, but investors shouldn’t get ahead of themselves, Belski said.
“Let’s take a deep breath, the loonie’s not going back to 65 cents,” Belski said, calling the currency by its nickname for the image of the bird on the C$1 coin. “I think 85 is a good bottom.” One Canadian dollar bought 90.20 U.S. cents yesterday.