Apr 10, 2019

Christine Poole's Top Picks: April 10, 2019

BNN Bloomberg

Christine Poole , BNN Bloomberg

Christine Poole, CEO and managing director at GlobeInvest Capital Management
Focus: North American large caps

MARKET OUTLOOK

The strong year-to-date rebound in stock markets globally can be attributed to 1) an oversold rally coming off depressed levels at the end of the year; 2) optimism on a U.S.-China trade agreement; and 3) a pivot in U.S. Fed policy to a more dovish stance, signaling a hold on further interest rate hikes.

Given its proven track record as a predictive leading indicator of a recession, the U.S. Treasury yield curve inversion on March 22, albeit temporary, shouldn't be ignored. On the last seven occasions that the yield curve inverted, the U.S. economy went into a recession within 15 months.

It should be noted this time the inversion (driven by a drop in 10-year interest rates) was relatively brief with a duration of seven days and is now positively sloped with a spread of over 10 basis points. Typically, the yield curve remains negative on average 11 months and a minimum of five months. As well, other cycle indicators such as manufacturing and services activity, employment situation, inflation, high-yield credit spreads and consumer confidence suggest continued growth, albeit at a slower pace. Finally, given the unorthodox monetary policy (in the form of quantitative easing) adopted by central banks following the financial crisis, the reliability of the U.S. yield curve as recession predictor is debatable.

For now, our conclusion is that the recent decline in longer-term interest rates signals muted economic growth prospects, but nonetheless continued growth. Globally, central banks have noted the slowdown and accordingly backed off on further rate increases and normalization policy programs.

With stock markets within striking distance of prior highs, key signposts that will support further gains include the resolution of trade wars, affirmation from hard data of a growing economy and growth in corporate profits.

TOP PICKS

ENBRIDGE (ENB.TO)
Recently purchased around $49 in April 2019.

Enbridge is a major North American oil and gas pipeline, gas processing and natural gas distribution company. The company accounts for 28 per cent of crude oil and 20 per cent of natural gas transported in North America. With 96 per cent of its cash flow underpinned by long-term commercial agreements, Enbridge’s operations are stable and predictable. Positive developments in the past year include regulatory approval of its Line 3 project along its preferred route, actions taken to streamline its corporate structure and sale of non-core natural gas gathering and processing assets at attractive prices. Enbridge has reaffirmed its 10 per cent annual dividend growth guidance through 2020, while maintaining a payout ratio of 65 per cent of available funds from operation. Enbridge offers an attractive yield of 6 per cent.

BROOKFIELD ASSET MANAGEMENT (BAMa.TO)
Recently purchased around $61.40 in March 2019.

Brookfield Asset Management is a global alternative asset manager with approximately $350 billion in assets under management. The company owns and operates assets on behalf of shareholders and clients with a focus on property, renewables, infrastructure and private equity. Brookfield seeks to invest in long-life physical assets that typically benefit from some form of barrier to entry, regulatory regime or competitive advantage that provide for relatively stable cash flow streams. The stock offers a modest dividend yield of 1.4 per cent.

DISNEY (DIS.N)
Recently purchased around $112.30 in April 2019.

Disney is a media conglomerate and premier content provider, comprised of media networks (41 per cent of revenues), parks and resorts (34 per cent), studio entertainment (17 per cent) and consumer products (8 per cent). Its strong global brand portfolio including Disney, ESPN, Pixar, Marvel and Lucas Film supports a multi-platform strategy to exploit content and intellectual property across Disney’s business segments. The acquisition of 21st Century Fox closed in March significantly enhances Disney’s content offering and distribution capabilities. Disney also owns 60 per cent of Hulu. The company provides a dividend yield of 1.6 per cent.