Darren Sissons, partner and portfolio manager, Campbell, Lee & Ross

FOCUS: Global and technology stocks 

MARKET OUTLOOK:

2023 has surprised. Interest rates continue rising, companies are reporting declining or nearly flat earnings while major indexes are up significantly. Broader media is sending a bifurcated message. On one hand, volumes of financial pressure, housing inequality, job losses, and poverty messaging. On the other, equally voluminous messaging on real estate profit potential, markets surging to new highs, big tech and AI are must-owns, and mid-to-upper income segments continuing to spend.  

A key narrative supporting 2023’s market surge is a belief that central bankers have engineered a soft landing. Inflation has fallen and although it’s above the two percent target, politicians across the globe are calling for a pause on further increases or an end to rising interest rates. However, inflation is not tamed. A soft landing assumes the economy will weaken but won’t suffer the typical recessionary collateral damage of spiking unemployment, earnings crashes, and widespread bankruptcies. Unfortunately, central bankers have a dismal track record of engineering soft landings. Corporates and consumers face a heightened cost of capital. Equally so, the narrowness of derivative market premiums and the heightened expense of protection strategies suggest the broader financial ecosystem is uncomfortable with longer-dated risk.

Highly concentrated index performance is a continuing oddity. Only a small subset of companies are driving indexes ever higher. Conversely, a large opportunity set of inexpensively priced targets now exist including the deeply discounted commodity sector and attractively priced emerging markets.

Now is not the time in the business cycle to be a patsy. Don’t chase returns. It makes little sense to deploy capital into large-cap tech (or any other market) following a 42 per cent Nasdaq 100 rally. A better strategy is trim winners, raise cash and deploy capital into the deeply discounted gems. Mean revisions is a constant threat and especially so when the cost of capital increases.

On balance, you make money when you buy so be judicious when deploying capital.

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TOP PICKS:

Bayer AG (BAYN FRA)

It is a pharma and agri-chem behemoth. The prior board chairman led the ill-timed, poorly risk-managed acquisition of Monsanto in 2018. The resulting glyphosate (Roundup) liability halved valuation. Bayer is actively counter-litigating with a reasonable degree of success. Management built significant reserves and moving forward, glyphosate liability funding will increasingly tail off thereby allowing management to focus on growth initiatives. Three drugs including Eylea (which treats wet macular disease) face a patent expiry cliff. The revenue drop-off will be somewhat offset as no near-term Eylea competitor presently exists and the commercialization of three new drugs. On balance, Bayer is a deeply discounted turnaround story priced at 50 per cent of its peer group. The risk reward over a three-to-five-year period looks attractive.   

Jardine Matheson (JARLF OTC)

A pan Asian multi-business unit operator currently yielding 4.4 per cent. China – U.S. political tensions weighed heavily on the shares but the underlying performance has improved sequentially. The recent acquisition of Jardine Strategic provides a better direct drive on controlled but not fully owned subsidiaries Astra International and United Tractor, among others. Catalysts for the name include lowered China-U.S. tension, improved commodity end markets, a China recovery and or China stimulus plus organic growth of its business units. A Singapore-listed, USD-priced share provides a highly liquid platform to leverage South East Asia, Hong Kong and Chinese growth.     

TC Energy (TRP TSX)

An attractively priced total return national champion. Management executed a modest deleveraging via the sale of the non-core Columbia Gas/Columbia Gulf asset for $5.2 billion. It guided an annual dividend growth of three to five per cent moving forward from the current 7.7 per cent dividend yield base. Improved leverage metrics, annual dividend growth and completion of the Coast Gas Link in the third quarter of 2023 are catalysts supporting an improved share price performance. Should interest rate consensus prove correct, the expected decline in interest rates within two years will drive outsized share price performance for elevated dividend-yielding companies like TC Energy. 

PAST PICKS: June 17, 2022

Atlas Copco (ATCO.B STO)

• Then: 84.76 SEK
• Now: 129.80 SEK
• Return: 53%
• Total Return: 56%

Shell Plc (SHEL NYSE)

• Then: $49.93
• Now: $61.64
• Return: 23%
• Total Return: 28%

Walt Disney (DIS NYSE)

• Then: $94.34
• Now: $88.40
• Return: -6%
• Total Return: -6%

Total Return Average: 26%