MARKET OUTLOOK:

It’s been an interesting 18 months. Across most portfolios, unless transitioning to a concentrated portfolio format, most managers are or have de-risked some of their bigger winners by trimming overweights. The clear winner has been large capitalization technology companies and semiconductors and internet related names in particular. However, one does wonder whether the next 12 – 24 months, which will undoubtedly include a broader economic recovery, will be as kind to those sectors. 

Interest rates are also a conundrum. The U.S. and Canadian central banks have begun asset purchase tapering, which will gradually lead to higher interest rates. However, consensus and logic suggests that with record debt levels across governments, corporates and consumers, at least for the next two years, interest rate rises will be modest. 

Taxation also warrants a forward-looking consideration. Higher taxes are a clear go-to strategy for governments to raise income. While rising house prices have synthetically raised tax income recently, it would be foolish to assume new stealth taxes, arbitrarily higher taxes on the assumed rich (earn in excess of $100,000 but who are already taxed at the 50 per cent marginal rate) and potentially a new tax on personal residence are not a possible headwind for investors over the foreseeable future. 

Inflation has also begun a worrisome rise. While double vaccination rates are rising globally and despite the onslaught of the Delta variant hospitalizations and deaths of the vaccinated population has plummeted. Consequently, the likelihood of rising demand driven by a return to a more normalized economy is drawing close. Given the abundance of liquidity and fiscal support, one wonders if policy missteps will acerbate the inflation trajectory making it the next new major risk.   

Looking away from the glass is half empty towards the glass is half full viewpoint, investors still have a surprising array of attractive investment choices. The classic buy and hold quality blue-chip strategy, which offers long term structural growth coupled with the ability to shield unwanted advances from the tax man are a natural buy. Unloved companies temporarily harmed by COVID lockdowns offer the promise of significant recovery gains from a COVID exit. Financials too will see higher interest rates moving forward and at current levels are attractively priced in many global markets. Last but not least mineral commodities offer an interesting second derivative play on electrification of vehicles and the transition to renewables.
 

TOP PICKS:

Johnson & Johnson (JNJ NYSE) 
Last bought $165.01
A 2.6 per cent yielding dividend aristocrat with 59 consecutive years of dividend increases. The opioid and talc liability was a drag on share performance but recent settlements have lowered that risk meaningfully. The balance between pharma, devices and consumer is a value add as it offers three separate growth drivers. 

Valuation is undemanding as it does not fully reflect: its COVID vaccine, additional tuck-in acquisition and the dividend growth profile. The past is typically a good reflection of future performance i.e. dividend growth and total return have grown at an annual average of 9.2 per cent and 8.6 per cent, respectively in Canadian dollars over the last five years.  

BHP Group (BHP NYSE) 
Last bought $61.08
The best of breed large cap miner continues to demonstrate a growth dividend profile with a big surge in the 2020 dividend.  
New CEO is re-focusing the company on growth initiatives including spinning out of the energy assets to Woodside, portfolio pruning, collapsing the dual-share structure, and final approval of the Jansen potash mine in Saskatchewan. 

2020 was a watershed year with peak margins and profits but forward guidance is somewhat lower so the valuation is now attractive. Net debt is only US$4 billion so plenty of fire power for corporate initiatives. Lithium is an obvious gap. Owns key commodities needed for renewables projects.

Visa (V NYSE) 
Last bought $240.08
The dividend, which currently yields 0.60 per cent has grown at 28 per cent per annum since 2008. A beneficiary of the transition from cash to digital payments. 
A COVID recovery play as a broader re-opening of the economy will drive higher government, corporate, and consumer spending and the higher margin travel segment. Expect continued share buybacks, which have averaged 2 per cent since 2016.  

A natural beneficiary of inflation regardless of whether or not central bankers deem it “temporary” or choose to officially reflect the real underlying rise in the cost of living.