Go Long on Canadian Insurance, Short on Banks - Dundee Capital

Go long on Canadian insurance companies and short on banks. That’s the advice from Dundee Capital Markets strategist Martin Roberge, who says this recommendation is mostly a valuation call.

He told clients:

With Canadian banks facing a technical roadblock, and lifecos deeply oversold and undervalued relative to banks, we believe the time has come to initiate a pair trade between the two groups.

Lifecos have deeply underperformed banks over the past six months as concerns about their hedging strategies on segregated funds and guaranteed notes weighed on market sentiment. The group has rebounded more than banks since the March 6 low, but at this stage in the stock market rally, Mr. Roberge believes that lifecos offer more upside potential – or lower downside risk.

If we are in fact past the worst point in the financial crisis, the strategist insists lifecos are too cheap relative to banks. He points out that lifecos trade at a 30% discount to banks on a price-to-book value basis. The lifeco group also has a higher dividend yield than banks for the first time in history.

“The last time that such depressed valuation metrics were seen was prior to the 2001 recession when investors became concerned about the economy,” Mr. Roberge said.

From a technical perspective, he noted that the Canadian bank index has ralled back to its 100-day moving average, which acted as an important roadblock in this bear market.

Comments

[Marcap:]

Shorting Canadian banks in my opinion, is an excellent move as they are now extremely overpriced.

True, Canadian banks do not have the same risk exposure in some areas such a mortgages and business/personal loans, as do many of their American counterparts. But this is due primarily to a stricter lending policy in Canada for mortgages and other loan financing.

Unfortunately, the same cannot be said for the extending of credit card debt. On the contrary, the fact of the matter is that like in the USA, Canadian banks are very highly extended in credit card financing, much of it to those who in reality did not even remotely qualify for the extremely high limits they were given. Once that sector of the market falls, which it will, the poop will surely hit the fan in both Canada and the USA alike, the result of which will not be very pleasant.

Mar 18 01:39 PM

[daily_reader:]

I think shorting Canadian banks is a senseless advice! They give purchasers good dividends which are not likely to be reduced in the short term and remain there in the long run if the economy is not upside down....Do not bet on shorting banks and long on insurance companies .....The only way not to lose money is not to trade at all if one has a chicken heart!

Mar 24 04:30 PM