Michael Sprung, president, Sprung Investment Management

FOCUS: Canadian large-cap stocks

MARKET OUTLOOK:

Through the first half of 2022, stock and bond markets suffered the worst six months since 1970. Since the end of June, the market has recovered roughly two-thirds of the loss since the beginning of the year. Rising interest rates and high inflation have combined with the ongoing issues that arose during the pandemic and the stresses of the Ukraine war, creating great uncertainty as to the sustainability of an economic recovery let alone the rising likelihood of a recession.

Recession or not, this is a very unusual circumstance wherein employment is at very high levels, while economic growth is slowing. In our view, the economic displacements resulting from the pandemic and the Ukraine war will not be fixed overnight. Higher interest rates may stem inflation and demand, but the bigger issues regarding supply chains, security of supplies and geopolitical tensions will take some time, perhaps many years to address. Interest rates are unlikely to go back to the unnaturally low levels enjoyed over the last decade even if inflation is contained. Reducing the leverage created by the giant debts incurred will be a longer-term project that will hamper economic growth going forward.

A higher rate environment will put fixed-income investments in a more favourable light as well as cause more attention to be paid to the valuations of equity securities placing those with nearer-term earnings and solid financials more desirable than those where growth has been the primary consideration.

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TOP PICKS:

BCE Inc. (BCE TSX)

BCE is Canada's largest communications and media company with operations in both wireless and wireline communications as well as Bell Media. BCE owns 37.5 per cent of MLSE. Ongoing capital expenditures have already increased fiber penetration and will continue to do so through 2025. Wireless operations have also been strong with increased roaming volume as pandemic restrictions have eased. BCE is well positioned to increase margins with improved operational efficiencies in both wireless and wireline. At current prices, the stock yields an attractive dividend yield of 5.6 per cent. The company has a history of annual dividend increases.

TC Energy (TRP TSX)

TC Energy Corporation (TRP) is one of the largest energy infrastructure companies in North America, focusing on natural gas pipelines, liquids pipelines, and energy (mainly power generation). Its key natural gas pipeline assets cover over 93,000 km. Its liquids pipeline network includes the Keystone pipeline system. TRP’s energy business includes power generation capacity in Canada and the United States as well as unregulated gas storage assets. TRP supplies over 25 per cent of the natural gas consumed in North America. TC Energy recently completed a $1.8 billion issue that further strengthens the balance sheet to finance future growth projects such as the US$4.5 billion Southeast Gateway Pipeline in Mexico. At current prices, the stock yields an attractive 5.5 per cent with a solid history of annual dividend increases.

CAE Inc. (CAE TSX)

CAE is a world leader in the design and production of flight simulation systems used in commercial and military applications. The company also provides training services to civilian and military customers globally. Civil aviation will benefit as air traffic recovers from depressed pandemic levels. Training services outsourced by airlines will also accelerate growth going forward. CAE has just announced a fifteen-year partnership to train pilots for Qantas Airways. In the most recent quarter, CAE announced some setbacks with cost overruns in two large defence contracts resulting in a significant pullback in the stock price. We believe that the company will recover from this event. Military services are likely to increase as well due to the current growing geopolitical tensions. Margins and free cash flow are expected to increase over the next few years.