May 29, 2019

Andrew Pyle's Top Picks: May 29, 2019

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Full episode: Market Call Tonight for Wednesday, May 29, 2019

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

MARKET OUTLOOK

Both equities and bonds are trading on vapours. I'd say there is more risk in bonds given the improvement in U.S. consumer confidence and potential for a wealth- and jobs-induced reacceleration in consumer spending late in the second or early in the third quarter and the fact that we’re seeing some pass-through of higher costs from tariffs to consumer prices. Just like 1.35 per cent marked the bottom for the 10-year U.S. bond in 2016 and 2.05 per cent was the closing low in 2017, I see 2.25 per cent as hard to break sustainably through. If growth does pick up, it will be hard for the Fed to maintain language that supports the market's belief in a rate cut later this year. Investors should not let their guard down and prepare for a potential move back to 3 per cent.

While equities would initially get support from friendlier economic data (assuming no further escalation in U.S.-China trade tensions), the potential for incremental gains after the sizable moves since the start of the year would be limited and depend on how much and how fast bond yields retrace. Outperformance by the TSX since November, when the ratio of the Dow to TSX broke above 1.70 has been impressive (the ratio now sits close to 1.55, its lowest since last August). If we see banks fail to make new 2019 highs then a summer pullback will drag down TSX performance, which is why I have been trimming the banks since late April. I believe there’s still some additional upside to oil and the energy patch after the pullback this month, but again failure to push beyond April highs could mark a more substantial retracement of the rebound since December. Either way, I have been lightening up Canadian equities in recent weeks after initially pulling back foreign stocks. Global health care has been one area that I have re-entered.

The major theme is a building of cash as we head into the summer. I have moved from 5 per cent cash at the start of the year to first 10 per cent and now approaching 20 per cent, with equal amounts coming from bonds and equities.

TOP PICKS

Andrew Pyle's Top Picks

Andrew Pyle of Scotia Wealth shares his top picks: Stars Group, XHC and Dollarama.

STARS GROUP (TSGI.TO)

We established a long position late in 2018 after the stock slumped from summer highs. Industry growth is seen as about 20 per cent yearly over the next five years. It was a slow grind up through $25, but the stock has come back to just under $23. Good support above $20 as we saw in December and March, as well as September 2017. I would classify the Stars Group as a medium-term “buy” with a relatively tight profit objective near-term of $30-35. Over five years, it should be able to see the $40 area.

ISHARES GLOBAL HEALTH CARE ETF (XHC.TO)

We used to have XHC in the portfolio until last year when valuations started to look too rich up near $50. The sector has felt pressure from speculation that a progressive Democrat platform of increased public healthcare would hurt insurers, but we believe this is premature at this stage of the election cycle. Downdraft in April provided an opportunity to re-enter and I would still view this as a long-term play. Using the ETF because it is currency hedged and provides better cross section than pure Canadian plays.

DOLLARAMA (DOL.TO)

Dollarama came under pressure late in 2018 on general market conditions and perceived failure to execute on new pricing model of dollar plus. Have seen a nice rally this year from the December lows and we continue to hold. Recently upgraded to a “buy” by Wells Fargo. Provided we don’t see a major meltdown in stocks near-term, I see potential up through $50. This stock is a good defensive addition if you believe in a Canadian consumer-led recession in 2020-2021.