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

FOCUS: Global and technology stocks

MARKET OUTLOOK:

The markets have deteriorated throughout 2022. Central banks across the globe are coordinating efforts to lower inflation through higher interest rates. Despite the prudence of that strategy, the new policy is long overdue but is likely to be only moderately successful. Inflation is running well above target thresholds but stripping out Ukraine conflict-related impacts and COVID-driven supply chain issues leaves a modest residual monetary policy that can effectively address it. Perhaps more importantly, simple, unadjusted inflation is already reducing demand, modifying buyer behaviour, and if uncontrolled, it alone will dampen demand without the aid of central bank actions.

Looking forward and bearing the above policy change in mind the marching orders are clear:

1. Capital preservation is paramount as markets re-balance.
2. The sell-off of high growth and especially unprofitable companies will continue.
3. Sector rotation has only just started, it will continue but expect regional disparities.
4.  A cash reserve is a critical asset as it both preserves capital and provides dry powder to re-positioning the portfolio.
5.  Most important, don’t fight the Federal Reserve i.e. don’t take a contrarian position on interest rates versus official central bank policy.

There is now a wide range of opportunities given the recent correction. Currently, the EAFE Index (Europe, Australasia, and the Far East) is down 18 per cent or 28 per cent year-to-date in Canadian dollars using the CAD – Euro as a currency proxy. China’s COVID-zero strategy has suppressed Asian equities to very attractive levels. The NASDAQ and S&P 500 are down 26 per cent and 16 per cent, respectively. On balance, the key consideration investors must weigh 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:

 Atco Ltd (ACO.X TSX)

The dividend currently yields 3.95 per cent and has grown annually for 29 consecutive years. Atco’s diversified base of regulated and non-regulated assets provides a steady stream of sustainable, growing earnings.  It has a growing stable of renewables assets including the recent hydrogen fueling project with CP Rail and a solar plant for Microsoft. It is attractively priced.

British American Tobacco (BTI NYSE)

Dividend currently yields 8.30 per cent. Management initiated a share buyback in February 2022 equal to 2.50 per cent of market capitalization. Good balance sheet, as the heightened debt related to the January 2017 acquisition of the balance of Reynolds it didn’t already own, has now largely been eliminated. An attractive business model in a rising interest rate environment i.e., it has strong pricing power and growing end markets via the emerging markets franchise. Given its sin-stock status, it periodically trades at a sizable discount to its normalized trading range. That sin-stock discount now applies, which prices the company attractively for new investors.

Kone (KNEBV HEL)

A growing dividend currently yielding 4.80 per cent. The company has a very strong balance sheet as greater than 10 per cent of its market capitalization is cash. A sustainable growth business model that operates with high barriers to entry. Kone typically holds either a first or second market share leadership position in all markets it operates in. The share price was +€70 in 2021. However, the drag from China’s COVID-zero strategy coupled with the onset of the Ukraine crisis, and the general sell-off of European equities and currencies, have collectively priced Kone attractively for new investors. Kone common shares can be purchased in the U.S. via ticker KNYJF.

PAST PICKS: March 3, 2021

 Accenture Plc (ACN NYSE)

• Then: $254.18
• Now: $276.31
• Return: 9%
• Total Return: 11%

Johnson & Johnson (JNJ NYSE)

• Then: $156.22
• Now: $174.14
• Return: 11%
• Total Return: 14%

 Power Corp (POW TSX)

• Then: $31.51
• Now: $35.08
• Return: 11%
• Total Return: 19%

 Total Return Average: 15%