Insights and Strategies
Investment Themes for 2022
As we embark on a new year, which so far has been anything but sunshine and rainbows, we thought it would be helpful to highlight several investment themes our research teams in Canada and the US have highlighted recently and which we also view as interesting for 2022. We remind investors to focus on the long-term and leverage periods of volatility to allocate capital towards high-quality and durable investment ideas/themes.
What’s on Our Radar?
- US Housing: population movements are driving historic housing demand, which we expect to remain robust for yearsto come, in particular homebuilding, and we expect companies throughout the residential construction supply chain to benefit (e.g., Canadian lumber companies, US home builders, etc.).
- Semi-conductors/Hardware: recent price increases could remain sticky even though many are looking for the “end of the cycle” on units, but we expect companies are likely to experience benefits from price increases for the first time in their history.
- Commercial Insurance: following a record year, we expect the earnings trend to be strong in both Canada and in the US.
- Asset Sensitive Banks: as rates go up, asset sensitive banks and smaller banks do better than larger (larger banks tend to do better earlier in recoveries). In Canada, we still prefer the big five.
US Housing Fundamentals Remain Strong; less upside for Canadian Housing
The US housing “super-cycle” is still in its early innings with years of growth ahead according to our research team. Here in Canada, we believe housing is much later in the cycle and thus see less upside, though supply challenges and strong demand will continue to persist for the foreseeable future and thus a likely tailwind for the market. Concerning US housing, our team’s constructive outlook for the sector includes:
- Positive household demographics, economic growth, and secular shifts in lifestyle preferences – housing demand will outstrip industry production capacity well into the foreseeable future.
- US home prices and effective rent levels, while decelerating from 2021 levels, will both grow above historical trends and likely outpace core inflation in the U.S. economy. The outlook for continued home price appreciation is notably above current consensus projections in the US, with a softer outlook in Canada for 2022.
- Supply chain disruptions will gradually ease as the year progresses, only to be replaced by increasing shortages of skilled construction labour that will prevent more robust growth in total housing starts.
- Mortgage rates will steadily rise in 2022, but at a controlled pace. Affordability will remain reasonably balanced across the US, versus the opposite extreme in Canada with very low levels of affordability observed across the country.