How to invest in a sideways market

Sionna's Shannon on why it's not time to bet against commodities.

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indecision road signSideways markets deliver below-average returns, and we probably have a few more years to go, said Kim Shannon, president and chief investment officer of Sionna Investment Managers, at the firm’s 2014 financial market review. However, there is an upside. “Canada has been outperforming the U.S….if history repeats itself, that outperformance should continue,” she added.

In today’s environment, Shannon believes it would be imprudent to bet against commodities, since developing countries are pushing the commodity markets. And, according to Marian Hoffmann, a portfolio manager with Sionna, there are some “attractive opportunities in the energy space.”

Outlook for oil
In the near term, Canadian oil faces some headwinds. First, Hoffmann explained, there has been huge growth in U.S. crude oil production since 2008, and the U.S. is set to become the No. 1 producer—surpassing Saudi Arabia and Russia—by 2020. Second, there are transportation issues: there is currently not enough pipeline to move Canadian oil to the U.S. “This is a big deal for Canada, because over 90% of our oil exports go to the U.S.,” she added.

So is there still a need for Canadian oil? North America requires more oil to meet the demand, said Hoffmann, adding that rail—while not the most efficient method—is helping to ease the transportation issue. In fact, she said, “the near-term uncertainty is creating opportunities.”

The financial sector
There are also opportunities in Canadian financials. “Banks are looking a lot more attractive today relative to the index,” said Mel Mariampillai, a portfolio manager with Sionna, noting that financials comprise about one-third of the S&P/TSX Composite Index. One benefit is that “the banks continue to operate in a protected oligopoly,” he added.

Going forward, concerns for Canadian banks include a slowing in consumer debt growth, regulatory changes, changes in the mortgage industry and the potential for rising credit losses, explained Mariampillai. The insurance industry, too, has its challenges. “Low interest rates are not good for life insurers,” he remarked.

All in all, it’s not an easy environment for pension investors—and that’s not likely to change anytime soon. So what’s an investor to do? “Learn to love 6%,” Shannon advised.

This article first appeared in our sister publication, Benefits Canada.

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