Funds
- Canada Life Canadian Value Fund - Mutual Fund
- Canadian Equity Value: Segregated fund
- Actions de valeur canadiennes: fonds distinct
Fonds
(Runtime: 6:00. Read the audio transcript.)
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There are still value opportunities to be found in Canadian equities, but after a powerful market run, investors need to be increasingly selective, says William Aldridge, managing director and portfolio manager with Mackenzie Investments.
Speaking on the Soundbites podcast, Aldridge struck a note of caution, saying investors should be wary of apparent bargains as valuations rise and market optimism increases.
“Investors have just been so risk-on in the market right now,” he said. “And that, for me, well, it’s a red flag. I’m concerned about that. It’s not, in our view, the time to be super aggressive on stocks.”
He said markets routinely cycle from periods of optimism to periods of pessimism, and right now they are closer to euphoria.
“At those points in market cycles, it doesn’t take much for multiples to contract,” he cautioned. “These are risks in the market that we need to be aware of as we build our portfolios.”
He said investors can still find opportunities in certain pockets of the Canadian market. One positive sign is the “fair number” of takeovers of Canadian companies, particularly in the small- and mid-cap space.
“That, for us, speaks to a dynamic where there’s a disconnect between what we call private-market values versus public-market values,” he said. “We’re seeing private buyers look at public securities and say, ‘There’s value to be had there.’”
He defined intrinsic value as what a knowledgeable buyer would pay for a particular company, in a given industry, at a given point in a cycle.
“You often hear this in the markets: quality businesses trading at a discount to fair value. That’s a perfect scenario for everybody. But in our view, those opportunities tend to get arbitraged away relatively quickly, certainly more so today than they would have 10, 20 years ago. So, we need to be a little more selective about how we think about relative value.”
In the commodities sectors, applying multiples to companies’ cash flows and earnings can be misleading, particularly when the price of the commodity in question is heavily influenced by external factors. He bases his valuations on normalized commodity prices.
“Take, for example, oil. The price of oil on a spot basis today is not reflective of the more normalized basis of pricing for oil. And if you look forward in the cost curve — kind of the futures market — in oil, you’ll see that those prices are quite a bit lower than where we are today,” he said.
“We think about what a normalized commodity price should be. And we use that in our determination of intrinsic value. We stay away from the application of short-term multiples of cash flows or earnings on short-term earnings because those can be volatile.”
He also puts emphasis on how companies respond to potentially disruptive forces, keeping a close eye on management’s ability to adapt as conditions change. For companies exposed to AI disruption, Aldridge said the range of potential outcomes has widened, increasing the importance of management agility.
“There’s no question that AI has had an impact on the valuations that investors are applying to certain sectors,” he said. “We want to ensure that companies that we’re investing in are agile. They’re not stuck in the old way of doing things.”
Aldridge said Canada has always been a wonderful opportunity for investors, with a different profile than many other markets. The Canadian equity market’s sector mix also gives it a useful diversification role in portfolios.
“The U.S. market is very strong in growth stocks and technology stocks. And of course, these are areas of the market that we are lacking in Canada. But we have other things to offer,” he said. “The Canadian market has a differentiated set of returns relative to the U.S. market, depending on what is driving the market cycle.”
He said there’s a strong role to play for Canadian stocks in investors’ portfolios.
“We have seen foreign capital and investor confidence improve under the Carney government. We have the commodities that the world needs. And now we are proving to be open for business.”
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This article is part of the Soundbites program, powered by Canada Life. The article was written without sponsor input.