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By Christian Charest | 04-30-2018

Fiera expects strong comeback for Canadian equities

Valuations are attractive, but the TSX has been "unfairly punished" by NAFTA uncertainty, says Fiera's Candice Bangsund.

Christian Charest: For Morningstar, I'm Christian Charest. We are four months into 2018 and Canadian markets have not been doing well so far. But the portfolio management team at Fiera Capital is bullish on Canada right now. To talk about why, I'm here with Candice Bangsund, Vice President and Portfolio Manager at Fiera Capital.

Candice, thank you very much for being with us today.

Candice Bangsund: Thanks for having me.

Charest: So, let's start with the Canadian economy. The latest macroeconomic landscape that your team just came out with is very positive on the Canadian economy. Can you tell us why?

Bangsund: Yeah. So, well, similar to what we saw in 2017, the Canadian economy actually remains quite resilient here in early 2018. The domestic economy is in decent shape. We've had strong job gains. The unemployment rate is at, I believe, a 40-year low. So, this is really lending support to the consumer and to domestic demand in general. At the same time, we've seen a recovery in business spending as well. We are seeing some government spending at the provincial level. So, all-in-all, the outlook is fairly constructive, and our outlook is even more appealing in that our expectation for stronger growth south of the border, in the U.S., based on the fiscal stimulus that we are getting there, should bolster exports for Canada, notwithstanding a negative outcome to the NAFTA negotiations.

Charest: We will get to that in a second. But another important element in the Canadian economy is, of course, the price of oil, which has been going up. Your previous forecast was right on the money at US$65, which is what we hit at the beginning of the year. Now, it's getting close to US$69. What's your forecast there?

Bangsund: So, we are calling for low-70s in crude oil, so still very much bullish. The developments have been very positive, obviously being driven mainly by stronger global growth and accordingly, demand. At the same time, we've got OPEC cutting production. So, that's placing a nice floor under prices, and we are starting to see the outcome of this combination of stronger growth, reduced supply, improving the balance for crude oil markets, and that's why we've seen such a nice rally here. Obviously, geopolitical tensions have also bolstered prices as well. That's a little bit more of a temporary aberration. But in general, we continue to be bullish based on the stronger global growth backdrop.

Charest: Now, obviously, Canada's economy is very dependent on foreign trade, particularly with our neighbour to the south. And the Trump administration has been rather unpredictable lately as far as its trade policy. What do you expect to happen with NAFTA in the near future?

Bangsund: Yeah. So, when we think about the risks to our outlook, obviously, politics is front and centre. And somewhat problematic is the recent stepped up rhetoric around protectionism. So, after spending 2017 focusing largely on pro-growth policies the U.S. administration seems to be shifting its tune. Now, our expectation is that inevitably the U.S. is focusing, or should be focusing, on China because this is really where the U.S. trade deficit is coming from, it's the trade relations with China, not so much its allies in Canada. We're actually fairly balanced.

So, our outcome for NAFTA is that they do come to some amicable sort of agreement and we are starting to hear rumours of this coming to fruition here as early as even next week. They are discussing things in Washington here this week and it looks to be a preference to expedite the process to get a deal done ahead of the U.S. mid-terms, ahead of the Mexican elections. So, we are a little bit more constructive on a positive NAFTA outcome, which would obviously lift a lot of uncertainty from the Canadian market.

Charest: Speaking of the Canadian market, you are also very optimistic there. As I mentioned in the intro, the Canadian stock market has had a bit of a rough start to 2018. We're down as of late April, a little over 3% total return right now. But you expect a strong finish. Why are you so optimistic?

Bangsund: So, we feel that the TSX has been unfairly punished because of that lingering headline risk pertaining to NAFTA, and it's really weighted on the entire stock market, as well as the Canadian dollar. So, you've had oil prices rising, but the Canadian dollar hasn't really done much either. So, we think this is really a result of the NAFTA headwinds. And once these get lifted, we could see sentiment start to improve and fundamentals to start to matter again. And by fundamentals, I'm talking about stronger oil prices, even heavy oil prices have recovered quite substantially here in the last month or so. All of this should fuel a more cyclical outperformance. Energy, financials, industrials, this should fare well for the Canadian equity market and help to close that gap between the Canadian and the U.S. equity markets that we've seen.

Charest: And of course, in the portfolios that Fiera manages, you are overweight Canadian equities right now?

Bangsund: Yeah. So, we are positioned for a reversal in performance there. So, while growth-oriented sectors of the market like technology or discretionary have really driven outperformance over the last year, we think that's going to rotate to more cyclical value plays in the equity space, which would inherently be positive for the TSX, while, like I said, that valuation discount hasn't been this steep since the depths of the financial crisis. So, we think that that's largely overdone and should close here going forward.

Charest: Hopefully, your optimism will come to fruition. Thank you very much, Candice, for being with us today.

Bangsund: Thank you.

Charest: For Morningstar, I'm Christian Charest. Thank you for watching.

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