Chris Blumas, portfolio manager, Raymond James Investment Counsel

FOCUS: North American large caps  

MARKET OUTLOOK:

So far this year, the monthly inflation readings in the U.S. have continued to top expectations. While core inflation is down significantly from its peak, it continues to remain stubbornly high and above the U.S. Federal Reserve’s two per cent inflation target. The most recent data for March was no exception and its release pushed up bond yields and triggered a sell-off in major U.S. equity benchmarks. However, on the positive side, downward trends in all three parts of core inflation suggest that U.S. inflation is likely to continue rolling downward this year.

Here in Canada, underlying inflation pressures continue to ease. On a three-month annualized basis, the Bank of Canada’s preferred measure of core inflation is running below 1.5 per cent. The Canadian economy has stumbled in recent months as higher interest rates have reduced discretionary income and negatively affected consumer and business spending.

Going forward, this sets the stage for a divergence in interest rates between Canada and the U.S. While the Bank of Canada is expected to lower interest rates later this year in June or July, the Fed is not expected to lower rates until sometime in September or October. This divergence would likely cause the Canadian dollar to weaken relative to the U.S. dollar and raise the cost of imported goods for Canadians.

While some investors are worried that the sticky inflation readings in the U.S. could be a catalyst for a correction in equity markets, I think this view is too shortsighted and that investors should remain well-diversified and defensively positioned. There are pockets of value in today’s markets and history has shown that the single biggest mistake an investor can make is to exit the markets at the wrong time.

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TOP PICKS:

CGI (GIB.A TSX)

CGI is an IT outsourcing and consulting company, and its revenues are split almost evenly between these service offerings. The company has clients around the world and a strong competitive position in North America and Europe. As companies look to boost their efficiency and transition to a more digital world, CGI’s service offerings and global delivery model lead to enduring client relationships and a high level of recurring revenues. Going forward, the CGI is well positioned to benefit from trends in digitization and has the financial flexibility to create value through acquisitions, organic initiatives, and share buybacks. The shares currently trading around 18 times forward earnings and have a trailing free cash flow yield of almost six percent. CGI does not pay a dividend to shareholders.

Yum China (YUMC NYSE)

Yum China is the largest restaurant operator in China. The company generates revenues through company-owned restaurants and from franchise fees. Yum China’s most well-known brands are KFC, Taco Bell, and Pizza Hut but their restaurant portfolio also includes several other well-known local brands and concepts. While some near-term headwinds associated with macroeconomic conditions persist, the company’s resilient business model, proven management team, and strong digital capabilities should allow it to continue growing sales and profits at an above-average rate. The company has an exceptionally strong balance sheet (net cash of almost $2.4 billion or $6 per share) and a loyalty program with over 400 million members. The shares currently trade at around 14 times adjusted forward earnings and have an adjusted free cash flow yield of almost six percent.

Brookfield Infrastructure Partners L.P. (BIP.UN TSX)

Brookfield Infrastructure Partners (BIP) is a global infrastructure company with a diversified portfolio of assets. It operates through the following segments: utilities, transport, midstream and data. The utilities and transport businesses are the most significant and accounted for around two-thirds of cash flows last year. BIP’s size, sponsor support, diversified operating model, and global platform are unique and allow the company to recycle capital opportunistically and grow cash flows at an above-average rate. The shares currently trade around eight times funds from operations and have a dividend yield of more than six percent. 

PAST PICKS: APRIL 20, 2023

Enbridge (ENB TSX)

• Then: $53.07
• Now: $46.28
• Return: -13%
• Total Return: -6%

Abbott Labs (ABT NYSE)

• Then: US$110.35
• Now: US$105.58
• Return: -4%
• Total Return: -2%

TD Bank (TD TSX)

• Then: $83.50
• Now: $78.71
• Return: -6%
• Total Return: -1%

Total Return Average: -3%