Andrew Pyle, senior wealth advisor and portfolio manager at The Pyle Group, Scotia Wealth Management
Focus: North American equities

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MARKET OUTLOOK

Reasonable summer so far for North American equities, fueled by stellar earnings and decent economic numbers, but investors remain nervous as we near what will be the longest expansion on record. While U.S. trade tensions with the world have cooled off a bit, this has been replaced by concerns over emerging markets, namely Turkey and now Chinese tech. It's easy to see why some investors may view the developments over the past week as a precursor to a seasonal pullback, especially with memories of September-October corrections in the past. I think the worry over the emerging markets sector are overblown and represent a buying opportunity. The emerging markets index is now down about 20 per cent and approaching lows of July 2017, yet growth still looks favourable. If U.S.-China trade tensions simmer down ahead of the November elections, this will take some of the pressure off this sector. From a portfolio perspective, this sector is relatively cheap, with an overall P/E of 12.5 and a dividend yield of 2.8 per cent. Compare that to a 20.5 P/E for the S&P 500 and dividend yield of 1.85 per cent.

Canada is back to playing back seat to U.S. equities, with the TSX down 0.8 per cent this quarter versus 3 per cent plus gains for the U.S. majors. After outperforming the Dow into the first week of July from the worst relative position on record back in January, we've seen a reversal. The ratio of the Dow to the TSX is now back to levels in early June. Materials have been a major drag as aluminum, copper and gold drift lower amidst emerging market concerns and a stronger U.S. dollar, but we've also seen weakness in consumer discretionary and energy. The latter is inevitable as we come out of the peak demand season for gasoline and a sustained break below $65 per barrel on crude oil sets us up for a return to Q1 levels. This is why we're steering clear of pure oil plays and focusing on pipelines. Financials and telecoms have shown resiliency this summer and we still like these sectors but are prepared to pull the plug in the fall if momentum looks like it's going to grind to a halt as in January and March. This is more of a risk to banks than telecoms.

Our macro view: Q3 U.S. data is looking decent, but with cracks emerging in housing and with auto sales flat-lining, there are initial signs that the U.S. consumer is getting closer to be tapped out. The U.S. dollar right now is way overvalued and will exert pressure on net exports. Combined with a potential pause in consumer spending growth, this will shift the Fed away from aggressive tightening. Last time the DXY dollar index was at these levels was back in June 2017, but the Fed funds target rate then was only 1.25 per cent versus 2 per cent today. Therefore, overall monetary condition tightening is worse than what we simply see in rates. When the dollar index hit its cyclical peak in late 2016, the rate was close to half a per cent. I believe markets are overestimating Fed tightening and therefore future dollar strength.

TOP PICKS

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PAST PICKS: JUNE 6, 2018

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