Andrew Pyle's Top Picks: March 7, 2023

Andrew Pyle, senior wealth advisor and portfolio manager, CIBC Wood Gundy

FOCUS: North American equities  

MARKET OUTLOOK:

It is becoming increasingly likely that the original market thesis of a first-half slowdown or recession, followed by a second-half resurgence in stocks is proving wrong and that we end up with the brunt of any economic storm later in the year. That suggests that equities are still overvalued relative to where earnings growth will be in a couple of quarters.

I expect the S&P 500 to at least retrace back to 3,800 and probably re-test the lows in October below 3,600. Similarly, the TSX should re-test support in the 19,150 area last seen in December. We still favour energy stocks at this juncture, given that crude futures have likely found solid support in the $70 area. It’s true that the announced growth targets by China over the weekend were lower than what the Street anticipated, but we are still going to see stronger energy demand from re-opening, increasing global travel and maintaining OPEC production levels.

The spread between bond yields and dividend yields is climbing back toward the highs seen in October and despite the modest retracement in bond yields in recent days, the bounce in stocks has been disproportionate. Actually, as we wrote last week, bonds still offer a better risk-adjusted return opportunity this year, despite the recalibration of U.S. Federal Reserve policy expectations. The question is whether the Bank of Canada realizes that its pause guidance from the last meeting was premature. Consensus still points to no change in rates this week and, if so, then a drop in the loonie back below 73 cents is in the cards – something the Bank has to be concerned about given the potential inflationary effect from a weaker currency. 

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TOP PICKS

iShares Core Canadian Government Bond Index ETF (XGB TSX)

Yield back up in response to real economy and inflation data simply brings the market back in line with the more likely Fed reality. While front end of the curve will offer better value, having exposure to longer-dated Canadian government bonds should generate better capital appreciation in the event that a recession develops in the second half and equities shift into risk-off mode in anticipation.

Enbridge (ENB TSX)

We like the stock for a number of reasons. Growth estimates of four to six per cent in EPS look reasonable and dividend growth should remain impressive as no major additional capital expenditures are expected. The company continues to move along a transition path to renewables and we see ENB taking advantage of acquisition opportunities when they arise. Stock is currently trading roughly 12 per cent below last year’s high and $60-65 should be doable over the next year. 

Power Corporation of Canada (POW TSX)

This is mainly a dividend play, but we also see stronger growth in the insurance business. Unlikely to see POW return to recent highs in the $44 area, but with a yield that is above banks and the TSX financials group as a hold, this is a good stock for TFSAs in our opinion. 

PAST PICKS: April 5, 2022

WSP Global (WSP TSX)

• Then: $158.67
• Now: $173.81
• Return: 9%
• Total Return: 10%

Linamar (LNR TSX)

• Then: $52.90
• Now: $76.99
• Return: 46%
• Total Return: 47%

Mackenzie Maximum Diversification Emerging Markets ETF (MEE TSX)

• Then: $25.63
• Now: $23.41
• Return: -9%
• Total Return: -7%

Total Return Average: 17%