Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

The aggressive rate hikes by the U.S. Federal Reserve and the Bank of Canada, while painful for borrowers, are achieving the desired result as economic activity is slowing. At the same time, the strength of the U.S. dollar is having a negative impact on U.S. corporate earnings, adding to investor pain. 

The inflation rate remains elevated due to war in Ukraine as well as ongoing supply chain issues. However, there are signs that inflation is peaking and that this rising rate cycle may well come to an end by the first quarter of 2023. This explains why the yield curve is inverted. Short-term bond yields are higher than longer-term yields, indicating that investors believe the Fed will start cutting rates within the next year or two – a reason for investors to stay the course despite the negative sentiment.

Warren Buffett’s comment about “buying when investors are fearful” always rings true in moments like these. The share prices of many of the world’s greatest businesses have been substantially marked down. Investors have the opportunity to buy these companies with attractive dividend yields and excellent total return potential. Waiting until “things improve” usually results in buying these same companies at much higher prices in the future.

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TOP PICKS:

Diageo (DEO NYSE)

Diageo is the world’s largest spirits producer with such leading brands as Smirnoff vodka, Johnnie Walker whiskey and Guinness. The company has unparalleled distribution and is focused on increasing its exposure to premium brands. Organic revenue should grow in the four to five per cent range, while margins should gradually increase. Free cash flow is funding dividend growth and share buybacks. Investors have an opportunity to buy a great business at a price which offers an attractive upside.    

State Street (STT NYSE)

State Street is a leading provider of custody, record-keeping and other related services to the institutional asset management industry. This is an oligopoly business, with only one other major competitor of the same size, so the company is well positioned in its markets. The company has gained market share over the past many years and has generated consistent earnings and dividend growth while remaining conservatively capitalized. This is mainly a fee-based business model based on assets under administration, so revenues are somewhat sensitive to markets. The shares have declined this year, and investors have the opportunity to buy a market leader at a discounted price.                                                                                       

Taiwan Semiconductor (TSM NYSE)

Taiwan Semiconductor Manufacturing Company (TSMC) is the preeminent chip manufacturer in the world today acting as the contract manufacturer for some of the largest companies in the industry. The industry is an oligopoly, with only three large players and TSMC is the best in the business. There is increasing demand for chips as technology becomes more integrated into products such as autos. TSM is undergoing a major expansion in response to the chip shortage and revenues are poised to rise sharply in 2024. At the current valuation, the shares are compelling trading at a P/E of 10 with a three per cent dividend yield.