Rudy Luuko: Hi, I'm Rudy Luuko with Morningstar Canada. With me today is Gaelen Morphet. She is senior vice president and chief investment officer of Empire Life Investments, and oversees more than $12 billion. Today, we're going to be talking about the outlook for the Canadian equity market.
Gaelen, one of your roles at Empire Life is to decide how much to allocate in Canadian equities in the global asset allocation mandate that you have. So, currently, are you overweight, underweight, or neutral in Canadian equities?
Gaelen Morphet: Well, in our tactical asset allocation fund, we can do anything we want. Currently we have about 75% in equities, and 25% in fixed income and cash. And of that 75% in equities, 39% is in Canadian equities. So that would make us underweight Canadian equities. And in fact, Rudy, that's the lowest exposure I've had to Canadian equities in my entire 30-year career.
Luuko: So that's low in relation to what your neutral weighting would be and so on, why is that?
Morphet: Well, we've actually been that way for the last couple of years. That's largely because the opportunity set in the U.S. is quite attractive. As you know, the U.S. underperformed for quite a long time, so there are a number of opportunities that still exist down there that enable us to have an overweight in U.S. equities.
Luuko: Nonetheless, Canadian equities is a very key asset class for Canadian investors. So how are you investing in the resources space in Canada? It's really too big an area to ignore.
Morphet: It is. And I should say even though Canada underperformed [compared to] a lot of the major markets, it still retuned 13% last year, which is a very, very good return by any standards, just as you say it underperformed other markets. The good news is that it returned 13% with only half of the market working. So if we did get the other half, which is the resource stocks performing, then we could have another very good year. We are always exposed to resource stocks, sometimes more so than less and in the past year, we were underexposed. We continue to like the energy stocks; [they] were less enamored by some of the base metals and other areas of the materials' subsector.
Luuko: Now gold stock is a very large portion of the materials sector and you haven't been very keen on those, have you?
Morphet: No, and I have had a history, as you know, in managing gold equities. We don’t actually have any, right now, and that's actually hurting us this year because the gold stocks are running. But I really do think that the fundamentals for a sustainable return on the gold equities are just not there. Right now the golds are doing well because they were such a large underperformers last year and as you know, in investing that tends to happen. The market tends to turn towards those stocks that have underperformed for a while.
And I do think we could have a little bit of a better return over the next month or two as the companies deliver good earnings for the first time in the long time, or at least above expectation. But it's not an area that we see is going to carry us through the balance of the year. We think there is a lot more opportunity in some of the other areas of the market and in some of the other resource areas, like the energy stocks.
Luuko: For instance, Suncor Energy, a big name, and one of your holdings. And oil sands—very much in the news [lately]. One of the issues for these oil sands producers is just getting their product out of Northern Alberta. How are these stocks, like Suncor, going to be affected by the uncertainty or the outcome of the debate over the Keystone Pipeline to the U.S.?
Morphet: Right. The Keystone Pipeline issue has been overhanging those stocks for quite some time, although the news out of the state department last week was very good for them and the stocks have appreciated somewhat. I really think that once that pipeline gets approved and I'm assuming it will, that there will be a better return out of those stocks than we've seen in the past and that's one of the reasons why we think the energy area will be an area that could carry the market over the next couple of years.
Luuko: But in the meantime, with the U.S. recovery ongoing and one of your strategies, according to your recent market commentary, has been to try to take advantage of that. What would be an example of a Canadian stock that you own that is a play, so to speak, on the U.S. economic recovery?
Morphet: Well, one stock we own is Alimentation Couche-Tard. As you know it, they own Mac's stores across Canada and actually throughout the U.S., they have convenience chains. So, I think that that's a stock that will continue to do well with the recovery in the U.S.
Another one is Constellation Software. They also have a number of companies in the U.S. that will benefit by the recovery. So those are two stocks that [we expect] will move ahead with the U.S. recovery.
Luuko: Also in your portfolio, one of your larger recent holdings was Cineplex. So it seems you're expecting a good showing from this stock. Can you comment on that?
Morphet: Sure. We've owned Cineplex for a long time. It's a great brand, a great product, [and] they are very innovative, [with] good management. They actually reported earlier this week and the numbers were softer; I think it's largely to do with the weather with fewer people wanting to go outside. [However],we really view that as an opportunity for people to buy the stock or at least for us to add more to the stock, because it has a very good template, and we expect that it will continue to grow its value.
Luuko: Thanks very much for this, Gaelen, and thank you for watching. For more on investing in personal finance, please keep coming back to Morningstar.ca.
