Market Update

Brandon Snow's picture

We have seen a step down in U.S. indexes today for no good reason of which we are aware. There are about 10 explanations for the move, but the fact of the matter is there has been a strong rally in the markets for the year-to-date and they currently lack a catalyst. We raised cash about a week ago in case of a pullback, and we are ready to put money to work if there is further weakness.

One interesting fact about the last few days is we have seen high volatility in the U.S. but not as much in Canada. In addition, the trading seems to be centered on a few sectors (technology and transportation today). Both of these attributes suggest that ETF/indexing flows are driving the swings rather than any fundamental stock purchasing.

We are watching these movements and have our list of names and the prices at which we want to own them. We continue to focus on two themes: North American energy and improvements in housing in the U.S. (and the deterioration in housing in Canada).

Comments

Submitted by Sterling Menard on

Hello Brandon,
Re: North American energy. I have been watching this also as there has been a number of calls including one from yourselves that oil is poised to fall. I've heard calls saying possibly down to $50(WTI), but most in the $60-$70 range, this is due, I'm sure to the U.S. shale plays. What I've been trying to get a handle on is the time line, are we looking at six months or 24months? I don't see how this can be a positive for Canada, or Canadian Equity funds heavily weighted in Canada. I've been waiting for a pullback to move clients to your U.S.fund, but would be interested in your thoughts.

Brandon Snow's picture
Submitted by Brandon Snow on

Really to get that sort of devastating fall in WTI pricing you need the global oil market (Brent) to crack, likely meaning we have to see cheating within OPEC. I don't think this should be a concern in 2013 (barring a global macro shock), but longer term, our view is the oil price is headed down. Of course the problem for oil companies in Canada is they don't produce at WTI prices and as we have all seen, the differentials have recently increased dramatically.

The changing North American energy landscape has investing implications across lots of industries and while oil companies might lose out, there are lots of companies that will benefit from the trend changes; it's our job as active managers to find these opportunities.

I am an equity bull, but I would not buy the TSX and unfortunately a lot of mutual funds in Canada measure themselves relative to this benchmark. There are great companies in Canada than can do well and even thrive with a lower/declining oil price over time. One secondary impact from a weak oil price will be a lower Canadian dollar, which is a positive for a number of names, who either export or own businesses outside of the country.  With funds like Cambridge Canadian Equity Corporate Class and Cambridge Canadian Growth Companies Fund, we can have up to 50% outside of Canada, which really helps as well.

From an economic perspective a lower oil price has a negative impact on real economic activity in Canada, but if the Bank of Canada is lucky, the Canadian dollar will fall enough to offset some of the oil price decline and hopefully reinvigorate the eastern part of Canada.

Thanks for the comments.

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