As lifecos’ companies are constructed extra clearly round insurance coverage, they don’t have the identical correlation to losses throughout a recessionary interval. Johnson additionally notes that they’ll improve premiums in an inflationary atmosphere as effectively. Whereas they’ve comparable drivers to the general monetary sector, he sees the important thing distinction round recession danger as a purpose to think about lifecos as a diversifier towards the banks.
That’s not to say Johnson thinks the banks will fare poorly this 12 months. He’s constructive on financials as an entire. He agrees that the choice by some Canadian banks and lifecos to pursue layoffs in This autumn of final 12 months helped set them up for stronger efficiency this 12 months. He notes, too, that these establishments have been fairly clear about value controls of their ahead steerage for 2024.
There are nonetheless unknowns for the monetary sector, Johnson says. Whereas traders and analysts are assured about charge cuts, we don’t know for positive if and once they’re coming. The timing of that path to a decrease charge can be key, as increasingly Canadians come up for mortgage renewals beneath these greater charges day-after-day. Fairness markets have priced within the chance of the primary cuts coming within the first half of this 12 months, however Johnson notes that there’s a danger within the BoC bucking these expectations and delaying cuts.
As a result of Canadian financials are so concentrated — even when we embrace the lifecos — Johnson is every firm individually to get a way of the place the sector could also be headed. That features the form of RBC’s acquisition of HSBC Canada in addition to TD’s integration of the US funding financial institution Cowan, which it acquired final 12 months. Johnson believes the macro outlook will solely take you to date in such a concentrated sector, so these apparently idiosyncratic tales have to be taken into consideration when traders search to grasp the place the sector is about to go.
Inside the broader sector, Johnson does see lifecos as nonetheless considerably underrepresented in Canadian traders’ portfolios. A few of that, he says, is as a result of big psychological shadow solid by the large six banks. A few of that additionally comes all the way down to an understanding of how these companies function. Banks are considerably simpler to grasp than lifecos and pull in additional investor curiosity accordingly. As advisors think about extra lifeco publicity for his or her shoppers, Johnson thinks they need to work to teach shoppers on the character of those corporations.
