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

FOCUS: Global and technology stocks

MARKET OUTLOOK:

Given current market conditions, a regime change is clearly in effect, which drives four investment considerations moving forward.

First, the markets have entered a bumpy road that will continue until a systemic problem presents, i.e. the failure of a major bank, pension fund or hedge fund. The U.S. Federal Reserve, which largely sets global interest rate policy, continues to press interest rates higher thereby increasing the threat of substantial economic carnage. The speed of the interest rate increases is causing significant economic pain in both the U.S. and abroad. Investors now have three interrelated choices:

• 1) Raise a cash cushion (if not yet done) and wait for market bottoming.
• 2) Identify companies to sell.
• 3) Prepare a buy list.

Second, while a somewhat deeper correction is expected I do not anticipate a catastrophic market melt. Once rising unemployment commences, the U.S. economy will suffer significant demand destruction. Additionally, the high U.S. dollar creates meaningful earnings headwinds for U.S. multinationals. Similarly, the strong Canadian dollar vis-à-vis our non-U.S. trading partners is a meaningful headwind. A high Canadian currency is typically associated with a deep recession shortly thereafter.

Third, ETFs and other passive investment products have been toxic in 2022. Reflecting on market leadership trends from past cycles, active management should now assume market leadership. In the immediate aftermath of the 2008 global financial crisis, active management led while passive indexed and ETF products were subject to significant sector rotations and middling returns. Should that prior pattern repeat, only after volatility falls and market order has re-established, the low-hanging fruit has been harvested and the heavy lifting is complete will passive investment strategies again assume a more prominent role.

Fourth, investors should bear the fruits of major corrections in mind. Buying quality names at deep discounts during a recession and holding through the subsequent economic recovery and the mean revision valuation reset is a silver lining as it drives out-sized returns. For context, buying quality European names during the 2008 PIIGS-induced crisis and holding for three-to-five years was upon closer reflection akin to shooting fish in a barrel.

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TOP PICKS:

Atlas Copco AB (ATCOB STO)

1) A progressive dividend currently paying two per cent. 2) A Swedish national champion and the global market leader in vacuum technology. 3) An asset-light business model, which generates high 20 per cent - low 30 per cent ROEs, benefits from growing end markets and a serial tuck-in acquisition strategy. 4) It is attractively priced given the Ukraine conflict, the weak Euro and related currencies, coupled with the deep discount of European equities. 5) History suggests a failure to buy Atlas Copco when it’s on sale is a mistake.

Kone Oyj (KNEBV HEL)

1) A progressive dividend currently yielding 5.40 per cent. 2) A Finnish national champion with a fortress balance sheet. 3) Holds the number two global market share in elevators and escalators. 4) A defensive business model supported by a wide moat regulatory barrier, which generates recurring revenues at +50 per cent of annual sales. 5) Given Finland’s close proximity to Russia, the weak Euro, weak Eurozone economy and China’s Zero-COVID policy, the company is attractively priced as it is now re-priced to its mid-2015 price range. 6) Normalizing COVID market aberrations (i.e., excluding the 2020 – 22 period), the company generated an average CAD total return of 22.9 per cent per annum for the 10-year period commencing Jan. 1, 2009.

Enbridge (ENB TSX)

1) A progressive dividend currently yielding 6.70 per cent. 2) A Canadian national champion with an attractive base of pipeline, gas transmission, and storage assets. 3) Defensive utility-like cash flows as 98 per cent of revenue is contracted with 80 per cent structured with either revenue escalators or regulatory recovery options. 4) Given the strong ESG lobby, it’s unlikely a major competitor pipeline project gets approved so margins will remain robust. 5) Enbridge has raised its dividend at an average of 10 per cent per annum for 27 years. 6)  The company has an active ESG pivot with $1.2 billion of new renewables projects coming on stream over the next calendar year.