Full episode: Market Call Tonight for Thursday, November 15, 2018
Andrew Pyle, senior wealth advisor and portfolio manager at Scotia Wealth Management
Focus: North American equities
Investors are getting caught up in what some believe is the start of the next major correction in equities. A near-reversal of all gains made in New York stocks since the start of the year and roughly a 7 per cent drop in the TSX is a far cry from a correction; I believe this is still a typical late-cycle tremor. Earnings growth expectations were overly elevated coming out of the summer and the reaction to tech misses underscores how much exuberance was built in. There’s no evidence that the U.S. or Canada are on the verge of a downturn and little risk that either country’s central bank will overshoot on rate hikes given the benign inflation environment and turbulence in markets. If the Fed starts to sound less hawkish in December, then I would expect the U.S. dollar to come off the boil as it did in the summer. This would provide some support to commodities and emerging markets.
The coincident slide in crude oil prices is reminiscent of early 2016 when the major averages had the worst first four days of a trading year on record, but is really a trend reversion towards the mean. From its low under $30 in 2016 to the recent spike to $75 on WTI, the crude price average would be just over $55. This is what we hit this week. On a weekly chart basis, the three-year moving average is close to moving above the five-year line, suggesting a near-term breakout back towards recent highs. I see this as an opportunity to add back into the portfolios pure oil plays like Suncor, which is finding support around $43. Also, companies like the Mullen Group (one of our top picks).
Europe and trade still pose significant risks to the outlook and potentially can bring the timeframe for a recession closer. I would expect the early phase of a slowdown or contraction in North America to start towards the end of next year, but if there’s no Brexit deal, coupled with a change of government in the U.K., and if tensions in Italy also deepen, then a further slide in global equities might tip consumer and business confidence here at home. The one positive feature is that trade issues have settled down a bit since the U.S. election.
MULLEN GROUP (MTL.TO)
Mullen Group has dropped down to the $13 area again, similar to what happened during the 2014-2015 meltdown. I wouldn't expect another 50 per cent bounce like in 2016, but if oil stabilizes and we see demand growth resume then conservatively I would look for a 20 per cent lift to $16. The price-to-earnings ratio is still on high side (about double to that of the TSX energy group), but there’s solid growth in the company’s dividend this year to a yield of 4.5 per cent.
After a dismal and early fall, BCE has once again resonated with investors looking for yield in the large-cap space. It offers a 5.5 per cent dividend yield. The stock trades around 9 per cent below consensus and has crossed above 100-day and 200-day moving averages. I would see a six-month target of $60.
STARS GROUP (TSGI.TO)
The Star Group’s decline from the summer high of above $50 looks overdone. The company has now completed its deal to be the biggest online game company in the U.K. International expansion looks positive and I expect to see the estimated 10 per cent annualized growth in online gaming to factor into a stronger earnings growth. The adoption of AR technology will fuel this growth as well. I have a conservative one-year target of $30, but this stock is definitely higher risk.
PAST PICKS: AUG. 16, 2018
- Then: $53.31
- Now: $45.90
- Return: -14%
- Total return: -13%
MACKENZIE MAXIMUM DIVERSIFICATION EMERGING MARKETS ETF (MEE.TO)
- Then: $23.80
- Now: $22.54
- Return: -5%
- Total return: -5%
MANULIFE FINANCIAL (MFC.TO)
- Then: $24.54
- Now: $22.00
- Return: -10%
- Total return: -10%
Total return average: -9%