14th June 2024

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Business Industry and Financial

Banking crisis buying opportunity for brave investors

Canadian banks caught in the crossfire look that much more attractive

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It has been quite the wild ride in the markets over the past two weeks, including the collapse of the Silicon Valley Bank and Signature Bank in the United States, euro-bank liquidity concerns spreading out from Credit Suisse Group AG and rumours of margin calls in energy.

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For those worried about this being another financial crisis, the environment today is much different than in 2008. However, parts of the market are starting to exhibit the same worries, with a flight to safety to U.S. dollars and Treasuries, which we think are creating some very attractive opportunities for those brave enough to be a contrarian.

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That said, investors need to be careful because there are still some potential risks out there. For example, we find it quite strange that highly speculative areas such as emerging tech have suddenly become a defensive position holding their own during the recent selloff. Perhaps this is because certain market participants are using them to punt on a U.S. Federal Reserve pivot toward lower interest rates.

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Overall, the good news is that the global economy is still on a reasonable footing, especially the U.S., with low levels of unemployment and improving producer price index and consumer price index data. One could argue the latest market correction may be just what is needed to slow what has been rather persistent services inflation by consumers — fear can have a large influence on behaviour.

But the tough part remains, which is how central banks will continue to manage inflationary pressures against what appears to be parts of the banking sector buckling under last year’s large upward move in rates. Fortunately, central banks such as the Fed are acting swiftly to stresses, which includes backstopping depositors.

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We also are starting to agree with the futures markets about the direction of interest rates. They are now factoring in a 100-basis-point rate cut by the Fed within the next 12 months. This is quite a shift from just two weeks ago when most were expecting a 50-point increase on March 23. It wouldn’t surprise us to see the Fed pause, thereby putting itself in a similar position as the Bank of Canada.

From a strategic standpoint, we are closely watching the ongoing correction in the banking and energy sectors, and have been deploying some of our excess cash on this selloff to maintain our positioning in these market segments.

More specifically, Canadian banks have been caught in the crossfire and look that much more attractive, especially considering how strong they are both financially and from a regulatory standpoint when compared to others such as the regional U.S. banks and certain parts of the Euro-banking sector.

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With the falling Canadian dollar, we wonder if the Canadian banks may start finding their way once again into global institutional portfolios.

The large correction in energy markets has also really left us scratching our heads because in our opinion it is not driven by fundamentals. It is also a much different situation than in 2008, when there was plenty of supply with a record amount of capital flowing into the sector and rapid growth in a highly levered U.S. shale sector.

Today, global inventories are at lows, supply is barely able to keep up with demand and may even be in a shortfall position as per a recent International Energy Agency report, especially as China reopens and India is in growth mode. Consequently, we did some buying last week by adding to some of our favourite Canadian oil names.

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Meanwhile, our overweight positioning in structured notes with high-single-digit, low-double-digit coupons paired with embedded downside protection continues to offer an excellent complement to our long positions that are focused on the value, bread-and-butter market segments.

If we were to offer any parting advice, we would stress the importance of remaining focused on the long game instead of getting lost in betting on the direction of interest rates or, worse, selling and moving to cash on fears of another large market crash.

Stay the course and keep looking for opportunities while others are hitting the exits. The good news is the search is no longer as hard as it was just a few weeks ago.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.

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