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

MARKET OUTLOOK

With interest rates rising very quickly at the beginning of the month, we expected there to be some volatility during October. We took profits on a few of our holdings to raise a healthy amount of cash. This provided a big cushion during the most recent wave of volatility, and we’re now looking to deploy this cash over the coming weeks and months.

We still believe that Canada offers better value than the U.S. stock market more broadly, despite the TSX having languished so far this year. With the USMCA trade deal now complete and the domestic economy performing relatively well, the Bank of Canada is likely to hike rates one more time this year. The bigger question for Canada going forward will be the direction we head after the Federal election next year. If a new government can do a better job at making Canada a competitive place to do business then this would serve as a boost to the Canadian stock market. In terms of areas of growth, we still favour U.S healthcare and U.S. technology. The Canadian energy sector also continues to be very cheap.

Economic optimism remains high in the U.S., with their fiscal boost after cutting taxes and regulatory reform. This boost to growth will be largely transitory though, as the U.S. is now running a massive deficit to fund the growth in fiscal spending. This will eventually lead to higher inflation and interest rates. For the time being the U.S. consumer is in relatively good shape and is back out spending money. This is a positive heading into the end of this year. There are long-term structural issues that still exist, however, and U.S. economic data in the housing and automotive retail sector look like they’re starting to slow or roll over.

With the U.S. unemployment rate at near 50-year lows, the Federal Reserve is likely to raise interest rates one more time this year and several times next year. A volatile move in interest rates can be disruptive to the stock market so as long as rates continue to go up, investors should expect for volatility to increase.

For these reasons, we believe it is important for investors to remain a defensive posture, with a focus on companies with high quality earnings and cash flow.

TOP PICKS

ONEX (ONEX.TO)

Onex is a very well run private equity firm that has a long track-record of generating strong returns. It’s now trading below its net asset value of approximately $85. They’ve made a number of new investments over the past two years, which should lead to strong net asset value growth over the next few years.

ALTAGAS (ALA.TO)

The shares have been under pressure over the past few months as there have been concerns about the amount of debt they’re carrying after the WGL acquisition. We think that all of this negativity is fully reflected in the stock price. AltaGas has good assets that produce long-term contracted cash flows, which are able to provide a growing dividend over time. We think that in the current range of close to 10.5 per cent dividend yield, the shares present a good buying opportunity.

VERMILION ENERGY (VET.TO)

Vermillion has exposure to Brent and European gas pricing, which provides them with strong cash flows. We like the diversified nature of the business and their strong management team. They recently completed an acquisition that’s set to help them grow production over the next few years. The shares are now yielding over 7 per cent and we believe they represent good value at these levels.

PAST PICKS: MAY 11, 2018

COUCHE-TARD (ATDb.TO)

• Then: $53.60
• Now: $61.45
• Return: 15%
• Total return: 15%

BROOKFIELD BUSINESS PARTNERS (BBU_u.TO)

• Then: $48.37
• Now: $52.35
• Return: 8%
• Total return: 8%

ENBRIDGE (ENB.TO)

• Then: $43.14
• Now: $42.94
• Return: 0%
• Total return: 3%

Total return average: 9%