Brianne Gardner, senior wealth manager, Velocity Investment Partners, Raymond James

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

Given current conditions, we believe markets are acting predictably. Markets were in overbought territory at the start of February and the S&P 500 was hitting notable resistance levels. Combine that with the fact that the second half of February is seasonally weak and the timing of a U.S. Federal Reserve pause is still unclear, and a five per cent pullback from the peak is not a surprise.

We expected Canada to pause rate hikes, which it did. The U.S. on the other hand is moving the goalposts on us yet again by raising the terminal rate. It’s plausible that the Fed is maintaining a hawkish tone knowing how the market will react. Even the wealthier people who tend not to curb spending in a recession will temporarily hold off on some purchases if their investment portfolios are taking a hit or not growing as strongly as they have in the past.

While we anticipated markets to react negatively to such news, we also believe investors are overreacting to short-term factors that will not change the course of the long-term trends currently underway. Primarily, the market is worried about re-inflation and the Fed reaccelerating its rate-hike path, but month-old inflation reports are still dropping slowly and most reliable leading indicators of inflation suggest the consumer price index (CPI) will keep declining over the next six to 12 months. Meanwhile, pretty much everyone agrees, whether the Fed goes 25 or 50 basis points in March, that an inevitable pause is close. We believe the markets will react very positively when that officially occurs.

It will likely be a bumpy recovery and there is enough noise to cause a lot of interim volatility, particularly until July. In my opinion, the big-picture trends will guide stocks higher in 2023. These trends include inflation falling, the economy staying stable enough to avoid a problematic recession, the Fed tightening cycle nearing a peak and earnings still growing.

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TOP PICKS:

MICROSOFT (MSFT NASD)

Last purchase was in February at $248.45 and before that, we added some at $216.88 in November

Microsoft not only is a leader in the sector, but management continues to invest in the future and position itself at the forefront of change. The strength in its cloud-computing services has driven growth as businesses continue to prioritize digital and virtual efficiency. Microsoft has invested $10 billion into OpenAI, and its super popular ChatGPT gives Microsoft positioning to not only compete with but beat Google in AI monetization. Think how many professions will be transformed by this and Microsoft is front and center. It’s expected to get regulatory approval in Europe on the acquisition of video gaming giant Activision Blizzard. Some of these video games rival the top blockbuster movies for revenue and Microsoft is now set to add new chapters to its already impressive growth story. We wouldn’t be surprised to see the stock hit $350 in a market rebound.

Wheaton Precious Metals (WPM TSX)

Last purchase was in February at $51.57 and before that we added some at $41.80 in November

Wheaton Precious Metals is the world’s premier precious metals streaming company with the highest-quality portfolio of long-life, low-cost assets. The stock offers leverage to commodity prices and exploration upside with a much lower risk profile than a traditional mining company. Given our positive view of WPM’s high-quality and diversified assets with its high-margin and scalable business model, we have a $69 target on the stock, a 30 per cent upside from here. Historically, gold represented a safe haven against inflationary pressures. While aggressive rate hikes through this tightening cycle kept downward pressure on gold, we believe 2023 will see the yellow metal have a better year. Gold tends to perform well in anticipation of lower rates, a weaker USD and the latter stages of a prolonged market selloff. WPM also has exposure to silver, which is an essential metal for both electric vehicles (EVs) and solar.

ENBRIDGE (ENB TSX)

Last purchase was in February at $51.58, but we’ve owned it since 2021

The pipeline and energy infrastructure giant transports more than 25 per cent of the total crude oil production in the North American region. The company recently provided it’s guidance for the year ahead and made its 28th annual dividend increase. The update reflected the strength of its business and the improving growth outlook. It is deleveraging the balance sheet and self-funding project spending. The ability to sustain this growth is due to being North America’s largest utility by customer base and has partnership projects in renewable power with the Canadian Pension Plan. It’s one of the highest-yielding real asset stocks and with a payout of roughly 60-70 per cent of its discretionary cash flow, the dividend should be safe. When interest rates start to fall, that will be extremely attractive. We have a target price of $60 which would give us 13 per cent upside plus the dividend. 

PAST PICKS: December 9, 2022

ABBOTT LABORATORIES (ABT NYSE)

• Then: $107.51
• Now: $98.08
• Return: -9%
• Total Return: -8%

BANK OF MONTREAL (BMO TSX)

• Then: $126.16
• Now: $123.56
• Return: -2%
• Total Return: -1%

CANADIAN NATURAL RESOURCES (CNQ TSX)

• Then: $74.65
• Now: $79.11
• Return: 6%
• Total Return: 7%

Total Return Average: -1%