Bryden Teich, partner and portfolio manager Avenue Investment Management
Focus: North American equities

MARKET OUTLOOK

Markets at all-time highs

As we head into the beginning of a new decade, I think investors should be very thankful for the returns that have been delivered this year. The MSCI All World Index recently broke out to new all-time highs in the last month and I think the backdrop for stocks remains constructive. What is notable about the recent rally has been its global nature.

This move to new all-time highs has been accompanied by a sizable increase in the percentage of bullish investors in the weekly AAII Sentiment Survey. We are at about 43 per cent bullish currently, much higher than the 20 per cent we hit at the beginning of October. Generally, we think any reading above 50 per cent bullish is a short-term sell indicator. Although we are not there yet, investors should pay attention to how the market behaves in January and look to potentially take some profits from any of their big winners.

Backdrop for a weaker U.S. dollar

One thing that investors should be thinking about as we enter 2020 is that there’s now a strong setup for a weaker U.S. dollar moving forward. The DXY topped at US$103 in January 2016 and we have recently put in a new “lower high” in 2019 which established the greenback is in a downtrend. The policy backdrop for a weaker dollar has been emerging over the past several years due to a number of factors, including the U.S. federal budget deficit running at 5 per cent of GDP. This has led to a substantial and persistent rise in the national debt, which is now compounding at a higher rate than nominal growth in GDP. This is an unsustainable situation that will likely manifest over the next decade, with the U.S. Federal Reserve having to launch a large-scale monetization program. We would argue that this is already happening based on recent Fed actions. There are other major headwinds for a strong U.S. dollar, including the presidential election in 2020, the Fed cutting rates and shifting views about negative interest rates in Europe.

TOP PICKS

CARGOJET (CJT:CT)

Cargojet is the leading provider of overnight cargo delivery services in Canada. In August, the company announced an official strategic partnership with Amazon which will provide a strong opportunity for future growth. Both Cargojet and Amazon have provided some guidance that this recent Christmas shopping season will set another record when it comes to e-commerce deliveries. Cargojet has spent the last few years optimizing its fleet, which we expect will provide further operating leverage and new avenues of revenue growth. Cargojet is a great way to play the continued growth in e-commerce sales in Canada.

BERKSHIRE HATHAWAY (BRK/B:UN)

Berkshire is the investment holding company run by Warren Buffet. We think the shares are trading at a great level for long-term investors to start building a position. The stock has lagged the broader U.S. market in 2019 as investors grew impatient with the large pile of cash that Berkshire is sitting on, currently around US$130 billion. This dry powder will position Berkshire very well to take advantage of any market dislocations over the coming years. At the same time, Berkshire also owns shares in a number of high-quality American businesses, including 10 per cent of many of the major banks, airlines, Apple and the BNSF Railway. Berkshire also has one of the best-run insurance companies in the world in GEICO.

MULLEN CONVERTIBLE BONDS (MTL.DB:CT) 5.75% 2026

Mullen is a Western Canada-based freight and transportation company that operates in trucking and logistics as well as in oilfield services. Mullen has a long track record of successfully integrating acquisitions into its business and the company has a very strong balance sheet. We are investors in Mullen through their 2026 5.75 per cent convertible debt which trades on the TSX. The company owns substantial amounts of real estate, so as debt holders we are confident in the creditworthiness of the company. Along with owning this bond, we have an implicit call option on Mullen’s shares for six years at a strike price of $14 per share.

PAST PICKS: NOV. 28, 2018

WPT INDUSTRIAL REIT (WIR-U:CT)

• Then: $12.70
• Now: $13.83
• Return: 9%
• Total return: 16%

VERMILION ENERGY (VET:CT)

• Then: $32.85
• Now: $21.03
• Return: -36%
• Total return: -27%

BROOKFIELD BUSINESS PARTNERS (BBU-U:CT)

• Then: $47.08
• Now: $54.29
• Return: 15%
• Total return: 16%

 Total return average: 2%