View Sample PDF - RBC Direct Investing

More documents

Recommendations

Info

Regional Outlook – Canada Stuart Kedwell, CFA Senior V.P. & Senior Portfolio Manager RBC Global Asset Management Inc. The S&P/TSX Composite Index extended its underperformance versus the S&P 500 Index, with an 8% decline during the most recent quarter, roughly double the pullback in the S&P 500. S&P/TSX earnings have leveled off almost 10% below the prior peak, while S&P 500 earnings have surpassed levels witnessed earlier in the decade. All major sector groups in the S&P/TSX Composite declined during the quarter, led by gold and energy, as the underlying commodities rolled over. We expect 2% growth from the Canadian economy in 2013, similar to the level expected in the U.S. Given a weakening Canadian dollar, a relatively modest earnings recovery, worries about the Canadian housing market and the reemergence of concerns that Canada could be negatively affected by slowing Chinese growth, the likelihood that Canada’s equity market will keep outperforming the S&P 500 continues to decrease. The Canadian dollar fell 4% during the quarter and briefly traded through our target. With a forecast for moderating economic growth, we continue to believe that the strength of the Canadian dollar versus the U.S. dollar has largely run its course, especially over the intermediate term. Investor sentiment is now back in the mid 30% bullish range, the same level as last fall when markets began to rally, and well below the 55% reading in February. The debate about the headwinds facing earnings and equity markets has resurfaced, leaving valuations at attractive levels over the Canada Recommended Sector Weights RBC Investment strategy committee may 2012 Benchmark S&P/TSX composite may 2012 Energy 26.0% 26.1% Materials 19.0% 19.2% Industrials 6.5% 6.1% Consumer Discretionary 5.0% 4.6% Consumer Staples 4.0% 3.1% Health Care 1.0% 1.6% Financials 31.0% 30.9% Information Technology 1.5% 1.2% Telecommunication Services 4.5% 5.2% Utilities 1.5% 2.1% Source: RBC GAM 22387 14307 9143 5843 3734 2387 1525 975 623 S&P/TSX COMPOSITE Equilibrium Normalized Earnings and Valuations Jun. '12 Range: 10650 - 15897 (Mid: 13273) Jun. '13 Range: 10729 - 16014 (Mid: 13371) Current (01-June-12): 11361 SAMPLE 398 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: RBC GAM medium term for investors who are basing decisions on our estimate of normalized earnings capacity. Dividend yields, free cash flows and corporate balance sheets are in good shape and reasonable returns are forecast, particularly relative to fixed income. In Canada, we highlight the difference in the valuation between the largest 60 companies and the broader market. For years, the valuations of these segments of the market have marched in lockstep. Recently, however, valuations of the larger companies have lagged, opening up an interesting opportunity. Price-to-earnings multiples of the banks are back at the low end of the trailing 10-year range. Despite decent second-quarter earnings, consumer 56 I The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012
Regional outlook – CANADA • Stuart Kedwell, CFA asset growth and the housing market, coupled with lower net-interest margins, remain key areas of investor focus. We continue to believe that a housing slowdown is manageable for the banks, although the loud debate will act as a brake on near-term valuations. As each bank prepares to meet Basel III capital thresholds in the next 12 months, the focus will eventually return to their considerable capital generation – even in a slow-growth environment. Returns on equity have proven resilient and the spread of these returns relative to those available from a 10-year bond remains attractive. Current dividend yields coupled with modest dividend growth should combine to provide satisfactory total returns. Insurers’ earnings have been weighed down by the growing consensus that interest rates will remain low for a long time. While the impact of low rates on earnings power could persist for several years, we believe insurance companies have enough capital and earnings capacity to weather this storm. From a portfolio standpoint, insurance companies provide some protection, since any rise in interest rates would negatively affect utility companies and real estate firms, and because we believe it’s doubtful that the insurers will need to raise additional equity. Valuation multiples in the Materials sector are unlikely to expand because of slowing growth in China. Yet at current commodity prices, the sector’s free cash flow is significant. We think the use of this cash in the next few years will be a key factor in the sector’s performance. As an example, we note that Potash Corp.’s healthy level of capital spending will start to tail off, leaving the company with strong freecash-flow generation even in a weaker commodity environment. Gold stocks lagged bullion again during the quarter as a number of companies continue to struggle due to high capital costs and operational issues. While the spread between traditional goldcompany valuations and bullion is at historically wide levels, some share prices are starting to look attractive on a free-cash-flow basis. Stocks of companies in the Energy sector continue to trade below levels one would expect given expectations for commodity prices. There are a number of reasons for this trend. Regional price differences have been elevated this year, and rising operating and capital costs continue to be a concern. As in the Materials sector, investors are highly focused on capital discipline. Stock valuations suggest that many energy companies will find it more attractive to buy back shares than embark on new projects. On the natural gas front, new drilling is finally beginning to slow in response to a very warm winter and weakness in prices for natural gas liquids. With an abundance of natural gas in North America and extremely low prices for gas relative to the amount of energy produced versus oil, the market is waiting for a concrete and sustainable demand response to help prices. A positive near-term surprise has been the increasing use of natural gas instead of coal for electricity generation, which has helped ease concerns about a lack of storage this summer. We expect gas to trade between $3.50 (the cash cost of production) and $4.50 (the marginal cost with a return on capital). Research In Motion has been a volatile stock as investors debate the value of an uncertain stand-alone business against a large patent portfolio and $4 per share of cash representing about 40% of its market value. Canada’s Industrials sector offers a number of opportunities where current share prices appear to offer good returns in a slow but steady growth economy. Should earnings at companies like Canadian Pacific and Finning progress in a reasonable manner in the years ahead, and the multiple paid on those earnings fall within historical bands, the share-price appreciation potential for both would be attractive. SAMPLE The global investment outlook RBC INVESTMENT Strategy coMMITTEE Summer 2012 I 57
Page 1 and 2:
The Global Investment Outlook RBC I
Page 3 and 4:
Contents Executive Summary 2 The Gl
Page 5 and 6:
Executive summary • Sarah Riopell
Page 7 and 8: Recommended Asset Mix Asset mix - t
Page 9 and 10: Recommended Asset Mix Balanced Asse
Page 11 and 12: Capital markets performance • Mil
Page 13 and 14: Global Investment Outlook Eric Lasc
Page 15 and 16: Global Investment Outlook • Eric
Page 37 and 38: Global Fixed income markets • Soo
Page 45 and 46: Currency Markets Dagmara Fijalkowsk
Page 47 and 48: Currency markets • Dagmara Fijalk
Page 57: Regional outlook - U.S. • Ray Maw
Page 61 and 62: Regional outlook - Europe • Domin
Page 63 and 64: Regional outlook - Asia • Yoji Ta
Page 65 and 66: Regional outlook - emerging markets
Page 67 and 68: Eric Lascelles Chief Economist RBC
Page 69 and 70: This report has been provided by RB
show all

View Sample PDF - RBC Direct Investing

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?