Financial advisors seeking growth opportunities for clients in the current market environment should look to U.S. equities, and particularly financial sector stocks, according to executives at TD Asset Management Inc.
Speaking at the Canadian Institute of Financial Planners (CIFPs) annual conference in Niagara Falls on Monday, David Sykes, vice president and director at TD Asset Management, highlighted opportunities in the U.S. stock market. He noted that the U.S. economy has been showing gradual signs of improvement.
“The U.S. economy is improving, but we’re nowhere near 3%, 4%, 5% gross domestic product (GDP) growth. There’s still quite a ways to go on that front,” Sykes said.
Nonetheless, he said earnings growth has rebounded nicely, which bodes well for equities: “The sentiment on stocks is very, very bullish,” Sykes said. “From my perspective, equities – and particularly U.S. equities – is the place you want to be.”
Although there has been some speculation that a bubble is emerging in U.S. equities, Sykes said he does not see evidence that this is the case.
There are currently some particularly attractive opportunities in the financial sector, Sykes said.
“If you look at the U.S., financials have had a terrible, terrible five or six years, but they’ve had a really good last one or two years,” he said. For instance, major companies such as J.P. Morgan and Wells Fargo & Co. have recapitalized themselves and have begun to hike their dividends as their results have begun to improve, Sykes noted.
Although lending activity at U.S. banks isn’t quite as strong as analysts would like to see, he suspects that it will increase over time as the economy continues to improve.
Furthermore, the valuations on many financial sector stocks remain at rock-bottom levels, according to Sykes. “High quality names are still trading a very attractive valuations,” he said.
In comparison, Canadian financial stocks are less attractive in the current environment, despite the relative strength they’ve shown throughout the financial crisis, Sykes said. Valuations on this side of the border are quite a bit pricier, relative to the U.S.
“The Canadian ones are a little bit more expensive,” he said. “You’re paying for that safety.”
Furthermore, although Canadian banks have performed very well in recent years – particularly in the consumer lending department – Sykes suspects that this level of performance is not sustainable.
“With the debt levels we have at the consumer level, we are not going to see personal lending growth in the 10% range anymore,” he said. “Personal lending growth could be 2%, 3%, 4%.”
A potential slowdown in the Canadian real estate market also threatens negatively affect lending activity for Canada’s banks, according to Anish Chopra, managing director at TD Asset Management. He said the slowdown in lending is already becoming apparent in the banks’ quarterly earnings results.
“Banks, essentially, are a play on GDP growth, and GDP growth in the U.S. is going to come in higher than it’s going to come in Canada,” Chopra said. “Overall, the picture in Canada certainly isn’t as good as it is in the U.S.”