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Welcome to Soundbites — weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life.

For today’s soundbites, we spoke with Stephen Arpin of Beutel Goodman Investment Counsel about Canadian equities and what’s catching his eye in the market these days. We started by asking how the Biden administration’s tough stance on pipelines could impact the Canadian oil industry.

Stephen Arpin (SA): The Keystone cancellation means that pipeline take-away capacity from Canada to the Gulf Coast is going to be more limited. If Canadian oil producers must transport oil by rail, our economics are substantially impaired by higher transportation costs. The impact is that growth in the Canadian oil production will be limited. Despite this backdrop, we recently initiated a position in TC Energy. North American natural gas is globally low-cost and will be required for many years. And the removal of uncertainty around Keystone XL means the company will primarily be weighted to natural gas transmission.

What sectors he likes right now.

SA: In general, the Canadian banks trade at attractive valuations, and they have attractive dividend yields with sustainable pay-out ratios. They’re more diversified into capital-light businesses such as wealth management and have very strong competitive positions. Our largest holdings — TD and RBC – have excess capital, which can be used for strategic acquisitions or share buybacks, and have substantial footprints in the U.S. markets where they can continue to deploy capital and build business value. Canadian insurers are also attractively valued. These companies have seen a substantial de-rating over the past few years, but we believe that their profits remain resilient, and the competitive position of these businesses is excellent. Rogers also represents good value in the telecom space and should benefit from improved roaming post pandemic and a strong position in 5G.

What he makes of the rise in retail trading.

SA: Retail participation in the equity market should continue to increase over time as accessing the market becomes easier. The frictional costs in the market keep declining. The ease of setting up accounts and more democratized information, driven by the internet, make investing much more accessible. The cost of trading equities has been improving for years, with declining commissions, lowered account minimums, discount brokers, online trading and, now, fractional indexes and shares. In general, when the market is down, retail volumes decline, and when the market rises, they improve. This does not indicate that retail investors are making successful investment decisions. They tend to be buying the tops and selling the bottoms.

Whether he’s seeing high volatility in Canadian equities.

SA: In general, in terms of the market, volatility has continued to decline as a whole, post the pandemic-related sell off in 2020. Volatility remains elevated versus the last decade. In the case of cannabis, institutional ownership of these equities has also remained low and this is likely a factor in the volatility of the equities. However, given the continuously changing regulatory environment and lack of profitability, the volatility of cannabis equities is likely to be high — as it would be for other businesses with these characteristics.

What sectors he’s avoiding.

SA: We continue to avoid gold equities, and only have one I.T. investment — OpenText Corporation. In general, we find the valuations in both of these areas of the market are high. In particular, valuation in technology spaces is very aggressive and the companies have benefited from increased growth rates from the pandemic forcing business online. We believe there’s better value in other areas of the market, particularly for companies which have solid free cash-flow generation and strong franchises, but have faced temporary headwinds from the pandemic.

And finally, when it comes to Canadian equities, what’s the takeaway?

SA: Historically, value investing has been able to create a lot of additional performance for investors, and we think that that will return as some of the pressures from the pandemic lift. Investors have sought growth and security, and as a result are paying some very, very high multiples for businesses that are showing good growth currently. But we’ve built a very high-quality portfolio and we have a lot of conviction that some of the opportunities that we have taken advantage of are going to drive good performance for our investors.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life.

Our thanks again to Stephen Arpin of Beutel Goodman Investment Counsel.

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