Pipelines run to Enbridge’s crude oil storage tanks in Cushing, Okla.Nick Oxford/Reuters
Canadian investors will have to seek returns beyond the country's second-largest asset class because oil will stay around $45 for the foreseeable future, predicts the top strategist at one of the world's biggest asset managers.
Crude plunged 3.7 per cent Wednesday to $44.73 a barrel, the lowest close since November, after U.S. data showed gasoline inventories continue to rise. Prices look "about right" at this level as better technology has lowered the cost of U.S. production to the mid-$40s from mid-$50s, said David Lafferty, chief market strategist at Natixis Global Asset Management, which manages $896-billion of assets.
"Because I'm a value guy it's very unusual for me to get more negative when the price of something falls," but that's been the case with crude prices, Mr. Lafferty said in a phone interview Wednesday from Boston. "It isn't clear to me that the global supply glut in oil is getting worked off any time soon."
Energy stocks account for 20 per cent of the S&P/TSX Composite Index and the sector is down 14 per cent year-to-date. Other investors such as Sun Life Global Investments are also getting bearish on Canada despite the central bank signaling interest rate increases as the economy emerges from the throes of $26 oil last year.
"While we're not negative on Canadian stocks, I definitely think that one of the larger sectors in Canada is going to struggle," Mr. Lafferty said.
Struggling Stocks
Canadian equities have underperformed in 2017, with the benchmark down 0.8 per cent compared with a gain of 8.9 per cent for the S&P 500. This is partly because of weak oil prices, which are down 17 per cent since the beginning of the year, but also because Canada doesn't have much exposure to the outperforming technology sector that has driven most of the S&P 500's gains.
"It's as much what Canada doesn't have as what it does have," Mr. Lafferty said.
More broadly, Natixis sees the best investment opportunities in Europe and the banking sector, but recommends diversification because stocks are getting expensive across the board.
"Our asset allocation view is more about diversification now, spreading around the money because there's no single compelling story that warrants a massive overweight," Lafferty said. "I don't think it pays to be bearish but I also don't think you should be sticking your neck out given where valuations are right now, either in Canada or globally."