March - CI Investments

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Signature ReportConsumerFinancialsStephane ChampagneVice-President,Portfolio Managementand Portfolio ManagerJohn HadwenVice-President,Portfolio Managementand Portfolio ManagerIn the first quarter, same-store sales for department storeretailers, such as Wal-Mart and Sears, were better thanexpected across the board. February and March salesshowed signs of sustainability, which could be an indicationof resurgent U.S. consumer spending this year.With the arrival of good spring weather in March, consumerscame out to shop, driving stronger-than-expected traffic atmost retailers. The positive impact of the Easter shifthelped the strong performance from specialty appareland teen retailers. (Easter was one week earlier this year,pushing sales into late March.)Over the quarter, promotions and inventories remainedwell controlled and monthly sales for both traffic andtransactions were up for the year-to-date. Big ticketsales continued to recover, particularly in home-relatedcategories. Strong areas also included apparel, accessories,shoes, and fashion jewellery.Stronger sales, which were up 8% on average in March,compared to mall traffic, which was up 5%-6%, appearto be driven by more shoppers turning into buyers andconsumers buying more items on each trip, both of whichindicate emerging strength in spending and a continuing ofthe behaviour seen in February.At Signature, we believe that the U.S. financial sectorhas already written off or established sufficient provisionsto cover the majority of anticipated credit losses. Thisshould contribute to growing confidence in equity markets.European financial institutions are making progress, butappear to be a few quarters behind the U.S. in fullyrecognizing problem assets. Plus, they still have more workto do in restructuring balance sheets. Anticipated regulatorychanges facing the financial sector will negatively influenceearnings power through a near-term transition period, buta stronger, more disciplined, lower-risk financial sectorshould not be viewed negatively.The past two years have presented extraordinarychallenges to the financial system. Companies with poorrisk management practices have been exposed, and inmany cases, eliminated from the investment universe.While investors have largely focused on the shockingevents experienced over the past couple of years, weshould give some consideration to the fact that overall thesystem has experienced a great cleansing. The survivingmanagement teams and business models obviously haveresilient attributes and investors can build positions in thesecompanies while risk premiums remain attractive.PAGE 10 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010
Signature ReportHealth careTechnology, media &telecommunicationsRui CardosoVice-President,Portfolio Managementand Portfolio ManagerMalcolm WhiteVice-President,Portfolio Managementand Portfolio ManagerWe are through the looking glass on the biggest issueimpacting health care stocks – U.S. health care reform. Inour view, the reform package does very little to ultimatelydent rising health care costs and will essentially represent agiant coverage expansion scheme, rather than true reform.While the system structure remains far too expansive andexpensive to run, answers to the complex problems are stillquite simple – if U.S. doctors were paid at levels similar toCanadian doctors and if capacity utilization rates for U.S.hospitals were similar to Canadian hospitals, U.S. healthcare spending would be closer to 11%-12% of GDP, ratherthan the 16%-plus that current spending suggests. Puttingthe right pressures on hospital inefficiencies will lead to agreater focus on costs (like medical device purchasing andcapital equipment utilization). We are far from seeing thepolitical will for these adjustments and are not confident wewill see them in the near-term.Sentiment in the information technology sector hasimproved since the start of the year. Areas such assemiconductors continue to benefit from positive trends.And consumers have been excited by the introductionof new products, such as the iPad, which bodes well fordemand later this year. After a long hiatus caused by therecession, large corporations appear to be at the start of atechnology capital spending cycle. In the media sector,advertising spending is expected to increase as businessconfidence improves, which is a positive sign.In Canada, telecommunication stocks have appreciatedover the past few months as dividend yields continueto look attractive and the initial threat of new wirelessentrants into the market appears to be overstated.With the health care reform clouds lifting, we expectthe market will once again focus on stock fundamentals.We expect the big winners to be drug companies, bothpharmas and biotechs, as the addressable patient populationexpands. Reform aside, we expect these sectors to rallyas improvements in R&D productivity and revampeddrug pipelines start to make it through Food and DrugAdministration (FDA) approvals. The pharma sector isfacing major challenges as a number of blockbuster drugs gogeneric, but the operating model is still profitable. Balancesheets are in excellent shape, sector valuations reflect direoutcomes, and there are still very high economic returnsfor innovative drugs that keep people out of expensivehospitals. We have our bets on the companies we believewill deliver innovation.PAGE 11 • SPRING 2010 PERSPECTIVE AS AT MARCH 31, 2010
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