Darren Sissons, vice-president and partner at Campbell, Lee & Ross

FOCUS: Global and technology stocks

MARKET OUTLOOK:

Central banks telegraphed clearly the world is changing: interest rates would rise as they did again in the U.S. on Wednesday. Central banks want consumers, corporations and governments to lower risk. The obvious strategy was to take profits in advance of rate changes, as I advised previously, raise cash and wait for buying opportunities.

Now that economic shock therapy has started, few portfolios are carnage free. The correlation between asset classes is now 1. In layman asset allocation terms, normalized correlation implies when equities fall bonds should rise i.e., a normal trading market. However, during market shocks, all asset classes move lower together in tight correlation i.e., a distressed market.

The central question now is should investors sell, buy or do nothing. The answer lies in knowing what you own well. Strong balance sheet companies will prevail and prosper in a higher interest rate environment. Inflation will remain a threat. Companies that are able to pass higher costs through will outperform. Energy and defense remain structural growth sectors for the foreseeable future. Safety and dividends will likely become important thematics again. On balance, assess each asset owned and judiciously weigh a sell, buy or do-nothing decision. Above all, treat cash reserves as a high-valued asset as it will be key to unlocking future rewards.

There is now a wide range of investable opportunities given the recent correction. Currently, the EAFE Index (Europe, Australasia, and Far East) is down 20 per cent, or 27 per cent year-to-date, in Canadian dollars using the CAD – Euro as a currency proxy. China’s zero COVID strategy has suppressed Asian equities to attractive levels. The Nasdaq and S&P are down 31 per cent and 22 per cent, respectively. On balance, the key consideration facing investors is the trade-off between initiating new positions in short-term trades for material gains or taking the longer-term view and targeting multi-year, structural winners.

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TOP PICKS:

Atlas Copco (ATCO.B STO)

1) Growing dividend currently yielding 2.20 per cent. 2) Global leader in vacuum technology. 3) +30 per cent return on equity supported by an asset-light business model. 4) Attractively priced given the widespread sell-off in European equities and a 10 per cent currency depreciation for the Swedish Krona versus the Canadian dollar, which collectively drive a 40 per cent discount versus January 2022.

Shell Plc (SHEL NYSE)

1) A growing dividend currently yielding 3.50 per cent, augmented by up to $15 billion of share buyback. 2) Given the current cost base, Shell and other oil majors are hemorrhaging cash. 3) ESG pushback against carbon has dampened the supply response given Russian oil sanctions, so structurally elevated profits will persist. 4) Shell should continue the renewables transition. 

Walt Disney (DIS NYSE)

1) A franchise of high valued, impossible-to-replicate assets. 2) Positioned to benefit from COVID recovery via theme parks, films and other assets. 3) Attractively priced due to consumer pushback over corporate wokeism, Florida utilities discussions, and the general sell-off in equities. 4) For the longer-term shareholder return context, the dividend grew at an annual average of 20 per cent over the 2009 – 2019 pre COVID period while the Total Return averaged 17.80 per cent over the same period.  

PAST PICKS: June 11, 2021

Algonquin Power (AQN TSX)

• Then: $19.46
• Now: $17.15
• Return: -12%
• Total Return: -7%

Illumina (ILMN NASD)

• Then: $453.17
• Now: $192.31
• Return: -58%
• Total Return: -58%

Thai Beverage (THBEV SGX)

• Then: S$0.69
• Now: S$0.65
• Return: -6%
• Total Return: -3%

Total Return Average: -23%