Zach Curry, director and portfolio manager, Greenrock Capital Partners

FOCUS: North American stocks

MARKET OUTLOOK:

Stock markets in Canada and the U.S. have continued to rally in 2024, with the focus on interest rates – their direction and timing – and inflation continuing to dominate the investment landscape.

Given that the S&P 500 Index has risen by more than 10 per cent since January, when expectations were for central banks to lower interest rates six or seven times during the year, we would expect more volatility going forward as markets now expect only one rate cut this year in the U.S. (and maybe two in Canada).

As long as economic activity remains positive and unemployment remains low, we believe that central banks will wait until inflation comes down further before making any decisions to substantially lower interest rates. We feel there is a greater risk of lowering interest rates too quickly and having inflation persist (or increase) as opposed to taking the time to wait until inflation is under control and continues downward to the targeted rate of two per cent.

Whether or not interest rates decline by 0.25 per cent or 0.50 per cent in June or July (or later in the year), we believe the trend remains downward for rates, which should be beneficial for the overall economy, businesses, and consumers. That being said, we believe the more important area of focus for investors should be on high-quality, well-managed companies that can take advantage of their leading positions in their industries and adapt to changes in any economic environment. Investments in these types of companies will reward shareholders over the longer-term.

• Sign up for The Market Call Top Picks Newsletter at https://www.bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or whereever you get your podcasts

TOP PICKS

Suncor (SU TSX)

Suncor is Canada’s largest integrated oil company, with more than 80 per cent of its production coming from oil sands assets. Along with its legacy oil sands surface mines in Fort McMurray and Firebag in-situ operations, SU’s assets include its MacKay River project, a 58.74 per cent interest in the Syncrude oil sands joint venture, and 100 per cent ownership of Fort Hills. Suncor’s production is almost 100 per cent oil weighted. Suncor is the second-largest refiner in Canada with three refineries, and also has refining capacity in the United States. SU shares currently yield 3.9 per cent. The company has reached its intermediate net debt target, and has increased its allocation to shareholder returns to 75 per cent of excess funds (up from 50 per cent). 100 per cent of its free cash flow will be allocated to shareholders once net debt reaches $8 billion.

Qualcomm (QCOM NASD)

Qualcomm is involved in the development and commercialization of foundational technologies for the global wireless industry. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). The QCT segment develops and supplies integrated circuits and software based on 3G/4G/5G and other technologies for use in wireless voice and data communications, networking, computing, multimedia, and GPS products. The QTL segment grants licenses or provides rights to use portions of its intellectual property portfolio, and the QSI segment invests in early-stage companies, in industries including 5G, artificial intelligence, automotive, consumer, enterprise, cloud, IoT, and extended reality. QCOM’s recent announcement with Microsoft could be beneficial, along with the growth of their Snapdragon chips.

Royal Bank of Canada (RY TSX)

Royal Bank is the largest Canadian bank by market capitalization, and one of the Top 10 largest global banks with more than $1 trillion in assets. The bank has the largest domestic Personal & Commercial banking franchise in Canada, with industry-leading positions in all key product categories. RY also has a diversified business mix that includes Insurance, Investor & Treasury Services and a sizable U.S. Wealth business. The company also has a global capital markets business. RY recently released their Q1 earnings, which were positively received, increased the dividend by three per cent and announced their intention to buy back 30 million shares (two per cent of shares outstanding). RY shares currently yield 3.8 per cent.

PAST PICKS: JUNE 1, 2023

Visa (V NYSE)

• Then: US$226.50
• Now: US$271.88
• Return: 20 per cent
• Total Return: 21 per cent

Canadian Pacific Kansas City (CP TSX)

• Then: $102.63
• Now: $105.99
• Return: 3 per cent
• Total Return: 4 per cent

Canadian Natural Resources (CNQ TSX)

• Then: $73.82
• Now: $96.60
• Return: 31 per cent
• Total Return: 37 per cent

Total Return Average: 21 per cent