Teal Linde, manager, Linde Equity Fund

FOCUS: North American mid and large-cap stocks

MARKET OUTLOOK:

Pandemic, war, inflation, surging rates, climate disasters and rising authoritarianism - the last three years have introduced no shortage of global challenges. Picking inflation, among the worst scenarios could be rampant inflation lasting for years. People thought high inflation would be transitory in 1965, yet it lasted for 17 years up until 1982. As investors, we cannot predict the future, but we should be aware of possible outcomes and position ourselves accordingly. Under what conditions could high inflation stubbornly remain high for many years? Consider the following:

Generals always fight the last war. The same seems to apply to central bankers. In 2008, the economy suffered a banking crisis. Governments were caught off guard and reacted to the situation by pumping hundreds of billions into the system. Through this bailout, the debts of the private sector were transplanted into the public sector. 

Not to get caught off guard again in dealing with the next crisis, in 2020, with the onset of the pandemic, central banks and governments jumped into action. They slashed rates to zero and pumped, this time, trillions into the economy and financial system, stating that many other tools remained available to do more. In hindsight, they overdid it, which contributed to the inflationary environment we have today.  

With governments becoming heavily indebted after 2008 and even much more so during the pandemic, it is not another banking crisis that we ought to worry about, but rather a sovereign debt crisis. To deal with excessive debt, governments have four tools to use. These include austerity, raising taxes, declaring bankruptcy, or inflating your debts away. The last option is the least painful choice for politicians and governments and could very well be where we head, which means high inflation sticks around. Owning stocks with pricing power should be prioritized.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS

ENSIGN ENERGY SERVICES (ESI TSX)

Last purchased on Oct. 25, 2022 at $2.97

With higher oil and gas prices, Ensign expects higher equipment utilization across its Canadian and U.S. operations, which is expected to drive increased day-rate prices. Management remains focused on increasing margins over market share. The company is also focused on debt reduction while taking advantage of improving pricing dynamics with its current relatively short-term price contracts. At current oil and gas prices, Ensign is expected to achieve positive net earnings next year. The last time it achieved positive net earnings, Ensign’s stock was trading at $10, back in 2014. Assuming continued high oil and gas prices and meaningful paying down of company debt, returning to $10 is achievable for Ensign. 

AIR LEASE (AL NYSE)

Last purchased on Oct. 24, 2022 at $33.28

Air Lease has grown at a solid clip over the last several years, but its valuation has compressed in tandem resulting in a flat share price, but with sharp gyrations along the way. Air Lease raised its dividend and remained profitable each year during the pandemic. Presently, new aircraft delivery delays from Boeing and Airbus are supporting higher lease rates for Air Lease. Air Lease is also able to pass on higher interest rate costs to its new customers and seek higher lease premiums from lower investment-grade lessees. 

BANK OF NOVA SCOTIA (BNS TSX)

Last purchased on Nov. 1, 2022 at $66.04

Bank of Nova Scotia is currently the least favoured big five Canadian bank. It trades at 8.2 times earnings and pays a dividend yield of six per cent. Nine months ago, BNS traded at $94. If it takes nine years to return to $94, that equates to a 37 per cent gain, or nearly four per cent compound annualized return. Assuming the current six per cent yielding dividend grows at a modest four per cent per year, investors stand to earn approximately a 10 per cent total compound annualized return over nine years. The big five Canadian banks have never cut dividends since WWII. This 77-year streak of sustained and rising dividends offers reassurance that Bank of Nova Scotia’s high-yielding dividend remains secure.