Canadian Stocks vs. US Stocks: In Search Of Quality by Evergreen Gavekal

“To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”

– John Templeton

Tyler’s Intro: In Search of Quality

  • Just as the best chefs customize their menus to feature the finest quality ingredients in different seasons, the best long-term investors tend to tilt their portfolios to where the greatest value lies.
  • In this week’s EVA Exchange, I’ve asked three members of our investment committee to share their thoughts on what could be the most exciting investment opportunities for the next three years… within the context of a diversified portfolio, of course.

Jeff’s Pick: Emerging Market Debt

  • Local currency debt in emerging markets has fallen by more than 27% over the past three years and has seriously underperformed other income asset classes as a result of extreme outflows, spread widening, and currency weakness.
  • While the near-term downside in this asset class is materially higher than developed market bonds, Jeff believes the long-term returns are likely to outpace most other income assets in the coming years as extreme outflows eventually give way to powerful investor inflows.

Dave’s Pick: Master Limited Partnerships and Other Energy Crash Victims

  • Master Limited Partnerships (MLPs) are currently trading 40% below their 2014 peaks and have become toxic in the minds of many investors. That said, the fact that these typically reliable owners and operators of “mid-stream” oil and gas assets have continued to grow their distributions amid the turmoil suggests that investors are largely over-reacting to what will likely prove to be a short-lived collapse in oil prices.
  • Dave believes that not only will energy prices eventually recover as excess supply corrects, but that a geopolitical shock in the Middle East could send prices soaring in the run-up to the 2016 US Presidential elections. In either event, those who buy into weakness into energy crash victims like MLPs – which continue to offer attractive yields in the high single digits – may soon look like the masters of the investment universe.

Worth’s Pick: Canadian Energy Stocks

  • A series of attractive 3-5 year investment opportunities are starting to emerge in Canada as a function of commodity-driven currency weakness, structural improvements in manufacturing competitiveness, and the welcome prospect of government-led infrastructure upgrading… not to mention an eventual recovery in oil and other key resource markets.
  • While large cap Canadian stocks are modestly attractive versus the S&P 500, the most compelling opportunity may lie in Canadian energy stocks which have dramatically underperformed their beaten-up US peers over the last 18 months. Even in the event of another major drop in global oil markets, Worth believes these assets are priced to outperform over a medium time horizon.

TYLER HAY / Chief Executive Office
To contact Tyler, email:
[email protected]

In Search Of Quality

There’s an old saying that there are two types of people: those who eat to live and those who live to eat. I’m the latter. During a recent trip to the Napa Valley, I was fortunate enough to join Mark Nicoletti, who runs the Family Office at Evergreen, to dine at The French Laundry. Throughout dinner, I was blown away by the amazing variety in the foods we ate. Toward the end of the meal, as I was loosening my belt, the chef and owner of the restaurant, Thomas Keller, sat down at our table. Mark and Thomas have bonded over their mutual love for golf and, as a result, Mark served more as a curator of the restaurant than a dining guest throughout the meal. At one point, I wondered aloud if Mark knew how Mr. Keller goes about creating his legendary menus. Expecting some type of answer about the chef’s imagination, cooking techniques, or patron’s palates, he gave a more succinct answer: “they use the best quality ingredients imaginable.”

This seems like such an obvious response. However, not all restaurants approach food this way. In most cases, a chef is forced to cook a rigid menu leaving them at the mercy of the ingredients’ quality.

We face a similar paradox in investing. Like a chef who’s forced to pick the freshest of the not-so-fresh ingredients, investment managers are often forced to stay within an asset class knowing it’s overvalued. Here’s a chart of the valuation of the Nasdaq during the late 1990s.

We face a similar paradox in investing. Like a chef who’s forced to pick the freshest of the not-so-fresh ingredients, investment managers are often forced to stay within an asset class knowing it’s overvalued. Here’s a chart of the valuation of the Nasdaq during the late 1990s.

NASDAQ PE VS. S&P 500 PE

Canadian Stocks vs. US Stocks

Source: Bloomberg, Thomson Reuters, Haver Analytics, and Citi Research-US Equity Strategy

If you were a manager of a technology-oriented mutual fund in those days, would you have walked in and told your boss it might be time to close it down and send investors their money back? No! That would have been an occupational death sentence. Even if your boss agreed, how hard would it have been to get clients to sell an asset that had catapulted almost straight up?

At Evergreen, we don’t confine ourselves to any single area of the market. Clients like the idea of going where the best value lies. Sometimes, we are early to the sectors that have gone from on-sale to fire-sale but over the long run this discipline has proven effective.

In this week’s Exchange, three of the members from our Investment Team have singled out certain investment areas they believe offer an attractive return profile over the next three years. While it’s dictated by compliance that we do not offer specific securities advice, the following sections point to segments of the markets investors should be searching for opportunistic entry points. It’s essential to express that we believe the following investments should be limited to a portion of a larger diversified asset allocation strategy and not as stand-alone investments.


JEFF DICKS, CFA / Portfolio Associate
To contact Jeff, email:
[email protected]

Jeff’s Pick: Emerging Market Debt

When thinking about the investment opportunities that will outperform over the next three years, it’s helpful to survey the areas that have underperformed the most over the preceding three years. In fact, legendary value investor Benjamin Graham highlighted that, “[asset classes] that have underperformed (over three- and five-year periods) subsequently beat those that have lately performed well. In other words, value investing works!” Emerging market (EM) debt would fit that mold almost perfectly. Over this time frame, contrary to its name, emerging market debt has completely submerged. As the table below shows, EM debt has fallen each of the last three years, and cumulatively by over 27%. This has been one of, if not, the worst areas to be invested within income markets. The remainder of this piece will focus on why EM local currency debt could be one the best performing asset classes within the income areas below over the next three years.

Income Return Summary

Canadian Stocks vs. US Stocks

Source: Morningstar

During the previous three-year period, we’ve seen emerging market bond yields rise, currencies plunge, and

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