Canadian GARP Securities Expert Says Western Canada Portfolio Theme Compelling For Investors

67 WALL STREET, New York - July 23, 2012 - The Wall Street Transcript has just published its Investing in Canada Report offering a timely review to serious investors and industry executives. This special feature contains exclusive industry commentary with expert Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Canada - Value Investing - Downside Protection - Dividend Yields - Global Macroeconomic Trends

Companies include: Tim Hortons Inc. (THI), TELUS Corporation (TU), Shaw Communications, Inc. (SJR), McDonald's Corp. (MCD), Canadian National Railway Comp (CNI), Target Corp. (TGT), Wal-Mart Stores Inc. (WMT) and many others.

In the following excerpt from the Investing in Canada Report, Willem Hanskamp, the Senior Vice President and Chief Investment Officer of C.F.G. Heward Investment Management, discusses the outlook for Canadian equities and some of his top picks.

TWST: The firm's investment strategy combines a top-down and a bottom-up approach. Based on this top-down analysis, in which sectors do you currently see some of the most attractive investment opportunities?

Mr. Hanskamp: I guess things have changed a little bit over the last year — 2011 was not exactly a great year for the Canadian equity market, certainly not compared to the U.S. And this year so far, we seem to be lagging a little bit again, although not as much as it was the case over the full calendar year of 2011. Most of this is due to the situation in the global market environment — mainly, of course, the problems in Europe — which is a continuation of what was already going on last year.

And then, we've also seen this year, added to that some of the weakness in the emerging economies, and most notably, of course, China which has had some negative impact on the commodity side of the economy in terms of lower demand for some of the main products that Canada exports. Energy is one of them, but the metals and the gold have come under pressure as well since they hit their highs. We are seeing some big declines in copper prices, as well as other metal prices. So that hasn't helped.

What has helped to some extent of course is that the U.S. economy has relatively done better. So some of the manufacturing-related businesses that didn't do as well last year have actually started to pick up a little bit during the beginning of this year.

Now, where we are today, of course, is that we are still worrying about the European situation. We don't see much of a final solution coming out of there. We also have still some questions about the growth potential short term in China. There still seems to be continuation of the weakness, but we haven't seen yet the full effects of some of the measures that have been taken recently in terms of interest rate cuts and reserve requirement changes, which could actually help the Chinese economic growth in the second half. And of course, the Chinese economy is the only one that we still think has enough firing power left to change their monetary and fiscal policies in a more positive way. That could very well get the growth going again somewhat later into the second half. And that's one important assumption that we base our investment strategy on today.

There are also some major themes that we have developed, and we basically fill in the portfolio largely surrounding these themes. There are actually three different ones. One is the theme of dividend growth, and I think we discussed it last year as well. Then a newer theme is around what we call the western Canadian growth opportunity. And then the third one is emerging market growth at large.

The dividend growth theme is based on investments in companies that have consistent and solid earnings growth track records, which we feel they can sustain in the future. At the same time, these companies should have been increasing their dividends over the years as well. So you get the combination of decent — not necessarily the highest — earnings growth, and some growth in the dividends. That over time will give you definitely superior returns.

This has been one of our major themes over the past three years, and we have quite a few names in our portfolios that have been selected with that theme in mind — companies, like Tim Hortons (THI); in the telecom area, companies like TELUS (TU) and Rogers (RCI), Finning Transportation (FTT.TO). They may also fit in some of the other themes, but they definitely are part of this dividend growth theme.

The western Canada growth theme is something that we recently developed. It is based on the idea/philosophy that Canada has always had this very strong north/south connection. That means importing and exporting, especially to and from the United States. Now, obviously, over the last 10, 12 years where the Canadian dollar has moved up versus the U.S. dollar — although over the last couple of years it's been more trending around par: that has, of course, changed the Canadian competitive position, especially in manufacturing.

As well, the slower trend growth in the U.S. also impacts the potential for export growth. The effect of that we see now, for instance, in the central provinces of Quebec and Ontario, where it becomes more difficult to compete with U.S. manufacturers that have actually been benefiting from a weaker currency, with the dollar being weak not only versus the Canadian dollar but also versus other currencies over quite a long period of time. So Canada has to actually replace some of that export orientation in another direction.

Now, although we have always been dependent on what happened in Asia in terms of overall development, in terms of our commodities, we have not necessarily been a big direct exporter from western Canada to Asia. Prices for commodities, of course, were always set on a global basis. However, as we have seen over the last couple of years in the oil prices, where we have U.S. price, WTI, and you have the Brent price, which has been much higher, you see the same in natural gas prices, which are way lower here on the continent than they are either in Asia or in Europe. So there is now an incentive to develop an export corridor directly from Canada to either Asia or Europe to benefit from those price differences. So we are seeing this philosophy develop, and the government of Canada has come out and introduced a long-term plan to develop a sort of an east/west type of trading corridor. Although commodities will be the first and most obvious beneficiaries of this plan, eventually other kinds of exports may benefit as well.

This plan will entail the development of infrastructure toward the west coast and also to the east coast. This takes, of course, a lot of infrastructure building that will definitely help, especially, western Canada because that's where most of the commodities are, especially those commodities that are still wanted and needed in Asia/China. This will be resulting in high level of investments in western Canada.

And you will, of course, see this reflected in demographics as well. The population of the west is already growing and will continue to do so while it is declining in the central part of Canada. So that changes the whole situation within Canada and with that, of course, Canadian corporations have to adapt. Many companies have already built up their business in the western provinces, and even to some extent, also in the eastern provinces rather than concentrating on central Canada.

One company that we invest in with this theme in mind is Canadian Western Bank (CWB.TO), which is a western-Canadian-based bank. It's not one of our six big banks, but it has definitely a much stronger growth record. Other companies that have good and expanding businesses there are Canadian Tire (CTC.TO) and Finning Transportation. The latter is a company that benefits from the buildup of infrastructure. Also, companies like TELUS, Shaw Communications (SJR) and Tim Hortons will benefit from this development.

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