July 19, 2015

In an interview with La Presse, Bob Gauthier provided his insights into the markets risks and opportunities 

1. What was the most significant event on the markets this week?

The progress in Greek negotiations with their creditors was definitely welcome but the uncertainty in their recovery will likely continue for the foreseeable future.  More important to Canadian investors, was the interest rate decision by the Bank of Canada.  The central bank is determined to stimulate export growth with a lower dollar in the wake of a collapse in oil prices.  To date, central Canada has failed to offset the impact of lower commodity prices in Western Canada however it may be too soon for the full impact of this monetary policy to be felt.

2. What are the indicators you watch closely and why?

We typically follow company specific indicators such as Return on Invested Capital.  Our firm builds portfolios from the bottom up.  We do not attempt to time the market based on macro events.  We look for financially strong companies with good long term prospects that are trading at a reasonable valuation.  The market is preoccupied with short term performance and this can lead to an overreaction to some information.  This creates a great opportunity for the long run and we attempt to take advantage of this short sightedness.  We like companies that have defensive business models and experienced management teams that are growing their profitability over time.  Impatient traders create opportunities for long term investors and this is our competitive advantage.

3. What would you do with a big sum of money today (name stocks)?

When deciding what to do with a big sum of money, our firm always takes the long view.  In general, given ultra-low yields for fixed income securities, we prefer a portfolio of high quality companies which often pay better yields with dividends that can grow over time.  Coupled with the potential for capital appreciation makes high quality equities that much more attractive.  A few stocks that would fit this criteria would include TD Bank, Manulife, Unilever, CVS and Diageo.  Of course, an investor should always be aware that there is higher volatility in equities versus short term debt instruments and they should consult an investment professional to determine what is appropriate for them.

4. What should we avoid right now as an investment?

Long term bonds.  Even though the focus is on falling rates driven by the Bank of Canada, our biggest concern in the long run is for rates to rise.  With 10 year bonds yielding less than 2%, investors are not being sufficiently compensated for the potential risk of rising rates which would negatively affect the value of their bonds.  The longer the maturity, the greater the sensitivity. 

5. What is being underestimated the most by the markets at this time in your view?

There is a very bearish attitude towards the Canadian economy at this time due to elevated home prices, consumer debt, slowing emerging markets and lower commodity prices.  While these are legitimate concerns, it appears the consensus is not giving enough credit to the strength of the US economy and the positive effect this will have on the global economy and more directly the Canadian economy.  Combined with a lower dollar this will help to offset some of those negatives, even if there is a lag in the impact.