Canadian fund managers are revamping their portfolios, picking cyclical stocks that could benefit from a return to a more typical economy in the coming year, as COVID-19 vaccines roll out and central banks provide a historic level of stimulus.
In Canada, which began doling out the Pfizer Inc and BioNTech SE vaccine on Dec. 14, cyclical stocks account for about 70% of the country’s main stock market. The S&P/TSX Composite has gained 2.6% this year, lagging the tech-heavy U.S. market. “We have gotten away from that really narrow focused leadership of large cap tech stocks and the work-from-home companies, which really had benefited before from the pandemic and the lockdowns,” said Greg Taylor, a portfolio manager at Purpose Investments.
“2021 could be a fantastic year for the rotation to continue, for the cyclicals to do a lot better.”
Norman Levine, managing director at Portfolio Management Corporation, has also shifted to a portfolio of potential winners in a return to normalcy.
Levine’s picks include Brookfield Property Partners LP , which owns a global portfolio of commercial real estate, including hospitality and retail assets that have seen closures.
SLGI Asset Management played the work-from-home theme for most of 2020 but recently rotated its portfolios more into Canadian markets from an overweight U.S. position, said CIO Sadiq Adatia.
“We think about things that will do well and we think financials, we think metals and the mining and energy sector,” he said. “People will be dying to get on vacation and maybe take more than their normal share (of holidays) to make up for that and that will require higher demand for energy.”
At Manulife Asset Management, senior portfolio manager Steve Belisle said he is bullish on auto-parts manufacturer Magna International Inc, expecting it to benefit from economic recovery and the production of electric vehicle parts.
Another cyclical stock Belisle owns is ATS Automation Tooling Systems Inc, which builds automated systems for medical equipment manufacturing related to vaccine production.
Supportive of economic recovery, major central banks, including the Bank of Canada, have pledged to keep interest rates at record lows over the coming years and continue with quantitative easing.
That has bolstered investor interest in digital currencies such as Bitcoin. The Bitcoin Fund has soared 65% since it began trading in Canadian dollars in October.
“It’s a hedge against all the money printing that is going on,” said Arthur Salzer, chief executive officer of Northland Wealth Management, noting “institutional investors are embracing” the asset class.
When it comes to Canada’s own currency, Fiera Capital Corporation portfolio manager Candice Bangsund said the downtrend in the U.S dollar should ultimately prop up the Canadian dollar.
“Our expectation for a global economic acceleration and corresponding strength in the commodity complex should be key tailwinds for the loonie over the next 12 to 18 months,” she said.
A weaker U.S. dollar, along with central bank stimulus and the vaccine news, could also boost prospects for resource stocks, say investors. Canada’s energy sector has climbed 40% since the end of October.
“It doesn’t feel like supply is going to be as easy to come on given some of the shutdowns within the U.S.,” said Purpose’s Greg Taylor, who favors “safer” natural gas names, including Tourmaline Oil Corp and Arc Resources Ltd, as well as oil-price sensitive names, such as Whitecap Resources Inc and Canadian Natural Resources LTD.
“You could be setting up for a period where energy, from both oil and natural gas, has the potential to go higher.”