Caisse's Sabia Says Stock Markets Will `Run Out of Gas'

The double-digit gains global stock markets have experienced in the past few years can’t continue much longer, and more modest gains are in store, said Michael Sabia, the head of Canada’s second-largest pension fund.

“It’s going to run out of gas,” said Sabia, chief executive of the Caisse de Depot et placement du Quebec, in an interview in Montreal.

The Caisse has benefited from the run-up in stock prices, in particular in the U.S., coming out of the recession. The Montreal-based pension fund posted an overall return of 12 percent in 2014 on its investments, fueled by an increase in its equities portfolio. Over the past five years, its overall return on its investments has averaged 10.4 percent annually.

Sabia said a more realistic annual return would be in the single digits once the public equity markets cool, although he cautioned he didn’t know when that will be.

The bulk of gains in corporate profitability, in particular among U.S. multinationals, have come from cost cuts, he said. Companies will have to boost sales too, for the Standard & Poor’s 500 Index to continue rising.

The Caisse isn’t forecasting a massive correction. Instead, single-digit returns are a more likely scenario, he said. The fund had C$225.9 billion ($182 billion) in total assets at the end of 2014, compared with C$200 billion a year earlier.

Quebec Retirement

The pension fund, which oversees the retirement savings of those living in Quebec, is a prominent investor in infrastructure, real estate, public and private equity worldwide. The fund is looking to diversify its portfolio globally and will pursue opportunities in the U.S., Australia, and Mexico, Sabia said. It will also be exploring some opportunities in India and Europe.

The Caisse has shifted about 5 percent of its exposure in Canada to other markets in the past four years and currently has about about C$117 billion, or 47 percent of its investments, outside of the country. That’s up from C$72 billion in 2010.

Sabia also took the opportunity to defend two embattled Quebec companies the Caisse is currently invested in: SNC-Lavalin Group Inc. and Bombardier Inc.

The Caisse is SNC-Lavalin’s largest shareholder with about 10 percent of its outstanding common shares. SNC-Lavalin was charged last week with attempted bribery and fraud related to construction projects in Libya and said it would vigorously defend itself against the charges, which it said involved employees who left “long ago.”

Governance Changes

SNC-Lavalin has made great strides in corporate governance as it moves to distance itself from a scandal over improper payments that led to the departure of its former CEO Pierre Duhaime three years ago, Sabia said. The Caisse has not altered its investment in SNC-Lavalin after the last charges and supports the board’s efforts to improve its governance.

“The SNC-Lavalin today is not the SNC-Lavalin of five or six years ago,” he said.

Bombardier issued C$938 million in new equity last week to help cover the cost overruns of its CSeries jet program. The Caisse participated nominally in the raise, just a “top up” of its existing investment, Sabia said.

It will also consider investing in whatever debt offering the company might consider, he said.

“They managed to do a pretty big equity offering. Given that and whatever debt they’re going to do, they’re going to come out of this period with a dramatically changed balance sheet,” Sabia said. “I think the runway is there for them.”

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