TSX trading at its biggest discount since 2002
Canadian banks are trading at their cheapest valuations in a decade and now is the time to buy, according to one strategist, who is now overweight on the financial sector.
Stéfane Marion, chief economist and strategist at National Bank of Canada, told BNN Bloomberg Thursday that Canadian banks are now trading at nine times forward earnings, which is the lowest in a decade.
“We’ve never seen valuations like this in Canadian banks,” Marion said in an interview. “We decided to move the banking sector to an overweight position. So, I do believe that financials with a four-per-cent dividend yield are attractive if you think the economy continues to grow.”
Marion said people are “nervous” about Canadian stocks overall, because the U.S. Treasury yield curve has flattened significantly, oil prices were under pressure and there were concerns about the housing market.
“But, aside from the resale market, home starts activity is pretty good and last month the employment rate for … prime-aged workers, people aged 25 to 54, which are the people that try to spend more in the economy, hit a new all-time high of 83 per cent,” Marion said.
“That’s massive and I think that does support the outlook for bank earnings.”
The S&P/TSX Financials Index lost 7.5 per cent in December, and 6.6 per cent in the last three months.
Steeper yield curve ‘critical’
Marion added that he expects central banks will hold on further interest rate hikes to rekindle inflation expectations, and that will have an impact on the yield curve.
“I think I have a good chance – a fighting chance – that the yield curve steepens again, and that definitely would help the overall markets,” Marion said. “It would also cheapen the U.S. dollar, which would be great for financial markets.
“It puts a floor under commodity prices, but again that steeper yield curve is critical for financials to do better in the next few quarters.”
The yield curve – the difference between long-term and short-term Treasury yields – steepened after minutes from the U.S. Federal Reserve’s December meeting were released Wednesday and showed that policymakers may be more patient about future interest rate hikes.
Even though there are fears of a recession if the yield curve inverts, Marion pointed out that the global economy is still set to grow 3.5 per cent this year.
“So, that would suggest slightly higher long-term interest rates and if it steepens that way then, it’s pro-growth for financials and the banking sector,” Marion said.
“I think that there’s a lot of pessimism that was built into the valuations, and now we have to normalize again, so that probably means more upside for markets to reflect that the economy remains resilient,” he added.