Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps

MARKET OUTLOOK

I write this outlook on the day of the federal election. While the immediate aftermath may cause some investors concern, in the long term it’s fundamentals that drive markets. Hopefully, politicians will take some concrete action to make our country a desirable destination for capital and investment.

Global economic growth has been anaemic in the expansion since the 2008 financial crisis. U.S. real per capita GDP has advanced by 1.5 per cent during this period, the slowest rate of expansion over a decade since the 1950s. The U.S. economy has done better since Trump took office, but the latest estimates are for slower growth going forward.

The OECD is forecasting slower global growth in GDP over the next few years. This outlook is consistent with global trends in manufacturing, transportation and warehousing, all of which have been impacted by trade disputes. Low interest rates have resulted in a huge increase in global debt. Investors have been pushed into higher risk assets, which has in turn pushed valuation levels up. Volatility in the global markets, particularly the bond markets, in the third quarter of 2019 would suggest that investors are losing confidence in the market's ability to maintain a positive direction.

In this environment, we recommend caution in stock selection. Look for companies with strong balance sheets supported by positive cash flow.

UPDATE

• Several clients were raising cash, or taking tax losses at year end, positions were sold in Manulife, ARC Resources, Vermilion, Precision Drilling, Canadian Natural, Suncor, Encana and Newmont Goldcorp.
• In March 2018, we sold a portion of our exposure to NFI Group at $58.60
• In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife, CAE and Suncor. One-half the CAE position was sold at $35 in June 2019.
• Sold Enercare in August 1, 2018 at $28.87 when Brookfield Infrastructure offer emerged.
• In the last month, some partial positions in Manulife, Hudbay Minerals, Home Capital, Stuart Olson, Nort West Company, Canadian Natural and Alaris Royalty were sold to raise cash for several clients.

TOP PICKS

SCOTIABANK (BNS:CT)
Last purchased in August 2019 at $68.40.

The Bank of Nova Scotia is Canada's third-largest bank and the most internationally diverse in its operations, with branches in the Caribbean, Central and South America. International earnings momentum has been improving, especially with the recent expansion in Chile. Canadian banking has benefited from recent acquisitions in wealth management. Overall, management has been very attentive to managing costs and expenses. The yield is 4.8 per cent following a recent dividend increase. The stock is trading at a reasonable valuation at current levels.

CANADIAN NATURAL RESOURCES (CNQ:CT)
Last purchased in August 2019 at $30.33.

Canadian Natural Resources is one of Canada's leading senior producers of oil and gas. It’s one of the best managed and best capitalized companies in the energy sector, with a diversified base of long-life, low-decline assets. This status affords the company a degree of resilience to underlying commodity prices that few companies in the oil patch can match. In addition, it has flexibility in its capital expenditure programs for mining, exploration and production and thermal projects. Canadian Natural is achieving synergies on the recent Devon assets ahead of schedule. Free cash flow is building, enabling an increase in share buybacks. The problems of the energy sector are well-known, but we believe that it will weather the storm and emerge in a strong competitive position. At current prices, the stock yields 4.5 per cent.

ENBRIDGE (ENB:CT)
Last purchased in August 2019 at $43.70.

Enbridge is a leading energy generation, distribution and transportation company in the U.S. and Canada. Its pipeline network includes the Canadian Mainline system, regional oil sands pipelines and natural gas pipelines. The company also owns and operates a regulated natural gas utility and Canada's largest natural gas distribution company. Additionally, Enbridge generates renewable and alternative energy, with 2,000 megawatts of capacity. Export pipe capacity is tight and Enbridge has the ability to supply some incremental relief through Mainline at modest capital cost. The company's stepped up asset monetization program has reduced leverage ahead of schedule. Enbridge has a highly contracted cash flow profile, financial flexibility and a secured $22-billion growth program. The current valuation is over-discounting issues with the Line 3 replacement and the possible Line 5 shutdown. A decision on Mainline contracting favoured Enbridge’s customers. At current prices, the stock yields 6.2 per cent.

PAST PICKS: OCT. 24, 2018

SUNCOR ENERGY (SU:CT)

• Then: $43.44
• Now: $40.31
• Return: -7%
• Total return: -4%

HUDBAY MINERALS (HBM:CT)

• Then: $4.92
• Now: $4.58
• Return: -7%
• Total return: -7%

NFI GROUP (NFI:CT)

• Then: $44.09
• Now: $28.62
• Return: -35%
• Total return: -32%

Total return average: -14%

TWITTER: @SprungInvest
WEBSITE: Sprunginvestment.com