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

MARKET OUTLOOK

The stock market has performed well so far in 2019 despite the volatile economic and geopolitical backdrop. The shift towards accommodative central bank policy at the beginning of 2019 has been a large contributor to the rebound in Canadian and U.S. equities. The economy continues to expand modestly on the back of a strong consumer, but there are now a number of economic indicators flashing yellow that suggest a recession may be increasingly likely in 2020.

The Federal Reserve and European Central Bank are both expected to ease monetary policy through the balance of 2019. Stocks may respond positively to further easing as they generally perform well in this late-cycle type of environment as long as there is no recession. The consumer is such a large part of the economy in the U.S. and as long as interest rates, inflation and unemployment remain low, it will be hard to get a typical recession because the backdrop for the consumer remains strong. Credit spreads in the U.S. also remain at historically tight levels, suggesting that the economy is going to continue to be fine. However, any significant pullback in consumer confidence or consumer spending would almost certainly mean that a recession may be imminent in 2020, especially with the warning sign that the yield curve is sending as well as the continued period of weak cyclical economic data, including business investment and exports.

There are also a number of geopolitical events developing through the balance of 2019 that could lead to further market volatility. These include the events in Hong Kong as well as Brexit in October.

The interest rate environment remains supportive of stock valuations, but not if earnings decline significantly or we enter a recession in 2020. For the balance of 2019, investors should expect the volatility to continue. Now is a good time to re-evaluate your asset allocation as well as take profits on some of your well-performing assets. For all of these reasons, we remain positioned defensively with a focus on high dividend-paying stocks like REITs and utilities and also with exposure to precious metals and areas of the market where there’s earnings growth, like healthcare and technology.

TOP PICKS

HUMANA (HUM:UN)

Humana is a managed-care health insurance company based in the U.S. We think there is a great opportunity among the U.S. health insurers. There has been a lot of political pressure on the drug and health insurance companies over recent months as we head into the 2020 election cycle and that has negatively impacted the sector. The concern being priced into the market is that the U.S. is moving towards a nationalized healthcare program, in particular with some of the Democratic presidential candidates. It is our strong belief that this will not happen. Humana has a strong tailwind as a Medicare Advantage provider, with over 70 per cent of their revenue coming from this segment. Medicare Advantage will continue to grow as the demographics are hugely in their favor, with 10,000 Americans turning 65 every day for the next 10 years. The majority of Americans on Medicare also buy supplemental insurance on Medicare Advantage.

NFI GROUP (NFI:CT)

NFI Group is North America's largest bus manufacturer specializing in the manufacturing of transit buses and zero-emissions electric buses. We think they have a big opportunity with the continued trend of urbanization and more people needing public transit routes throughout North American cities. They’re also a leader in the zero-emissions electric bus space, which will continue to grow for years to come as cities look to move people around in a more environmentally friendly way. The shares have been under pressure for the last year because of lower guidance and orders. We think this presents a great opportunity for long-term shareholders. The shares currently yield over 5 per cent and the company has a free cash flow yield of about 10 per cent.

BROOKFIELD PROPERTY PARTNERS (BPY-U:CT)

Brookfield Property Partners is the diversified real estate arm of Brookfield, with global real estate focused on premier office and retail. The shares trade at a significant discount to net asset value and they’re yielding roughly 7 per cent.

PAST PICKS: AUG. 17, 2018

WPT INDUSTRIAL REIT (WIRu:CT)

• Then: $13.90
• Now: $13.82
• Return: -1%
• Total return: 6%

AIR CANADA (AC:CT)

• Then: $24.01
• Now: $44.36
• Return: 85%
• Total return: 85%

CENOVUS ENERGY (CVE:CT)

• Then: $11.96
• Now: $11.28
• Return: -6%
• Total return: -4%

Total return average: 29%

WEBSITE: avenueinvestment.com