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

FOCUS: Global and technology stocks

MARKET OUTLOOK:

The Liberal government’s budget last week has far-reaching considerations for investors. The budget targeted capital gains and those who have or are successfully saving for retirement. Short-term trading will be punitively targeted by the new legislation, so a focus on extending investment horizons is now an obvious workaround. Equally so, the crowding out of investment by taxation and government spending that will result from the poorly formed policy will reduce forward-looking investment returns in Canada so global market exposure should be a focus.

The above adverse policy mistake aside, the macroeconomic environment remains largely status quo. While consumers feel the bite of higher interest rates, early indicators of broad financial pain, such as rising credit-card defaults and lagging stress indicators of rising unemployment and increased part-time employment, highlight a slow economic deterioration. However, currently, financial stress is well contained and behaving rationally so on balance the economy remains reasonably healthy. Given the foregoing and the continued fiscal spending, interest rate cuts could be delayed until greater financial pain presents and the magnitude of rate cuts is probably less than widely believed.

Looking forward, once rates decline the Canadian dollar will fall, which will magnify returns from investments in stronger currencies such as the U.S. dollar, Swiss Franc, and the Euro. Inflation remains untamed and is being fuelled by further government spending. Inflation trades therefore offer continued upside as we are currently experiencing with energy, metals, and financials. Near term, market rotation is occurring at the margin so maintain adequate cash reserves for new opportunities.

TOP PICKS:

British American Tobacco (BTI NYSE)

1. A defensive consumer staple with a large moat.
2. A sustainable 10 per cent dividend yield, which is in line with sector peers.
3. Given the ESG overreach and despite the transition to noncombustible products, the company and sector trade at deep discounts versus historical valuation metrics.
4. A new US$2 billion share buyback authorized through 2025.
5. From a total return perspective, assuming zero dividend growth, a five and 10-year investment horizon will yield 50 per cent and 100 per cent, respectively of an investor’s cost base. Any growth in dividends and or capital gain will be additive to those returns.  

Enbridge (ENB TSX)

1. A mission-critical, North American, infrastructure energy backbone. It’s the dominant natural gas supplier in Canada and provides 20 per cent of the natural gas consumed in the U.S.
2. The overdue U.S. electrical grid expansion is likely supportive of North American natural gas and oil, which benefits Enbridge.
3. A defensive tolling business model, as 97 per cent of revenue is contracted on Take-or-Pay payment structures, which provides downside protection to the 7 – 9 per cent medium-term growth targets guided at the recent capital markets day.
4. An inexpensive valuation vis-à-vis historical metrics and a sustainable 7.50 per cent dividend yield.

Givaudan (GIVN SWX)

1. The global leader in fragrances and flavours with a best-of-breed global consumer staple client roster.
2. An inflation beneficiary as it passes on price increases plus a profit margin in a rising cost environment.
3. A low-risk tuck-in acquisition strategy incrementally builds depth and scale.
4. A serial dividend grower and Swiss Franc reporter grew dividends in Canadian dollars at an average of 6.2 per cent per year in the last decade.   

PAST PICKS: April 28, 2023

Accenture (ACN NYSE)

• Then: US$280.29
• Now: US$302.57
• Return: 8 per cent
• Total Return: 10 per cent

Samsung Electronics (SMSN LON)

• Then: £1234.00
• Now: £1419.00
• Return: 15 per cent
• Total Return: 17 per cent

Toronto-Dominion Bank (TD TSX)

• Then: $82.07
• Now: $81.35
• Return: -0.9 per cent
• Total Return: 4 per cent

Total Return Average: 10 per cent