Christopher Blumas, vice-president and portfolio manager at GlobeInvest Capital Management
Focus: North American large caps

MARKET OUTLOOK

2019 has been a very strong year for global equity markets with Canadian, U.S. and European equities up 15 per cent or more since the start of the year. When you look across most classes, almost everything is up so far this year. The one exception is volatility, which is down around 45 per cent year-to-date. So, what’s driving equities (and most other major asset classes) higher? In a nutshell, global central bank policy. After a rare decrease in the global money supply in 2018, major central banks around the world have changed course and have forecast their intentions to be more accommodative in an attempt to stimulate global GDP growth.

Going forward, we think that investors should take a cautious approach to the equity markets as valuations have become more stretched and there are a number of short-term triggers that could cause an increase in volatility. Lower-than-expected interest rate cuts by the Federal Reserve, rising global trade tensions between the U.S. and China, and weaker-than-expected earnings growth from the U.S. markets are a few of our biggest worries. Overall, we think that investors should remain disciplined and wait patiently for market dislocations and/or company-specific volatility to present itself and avoid the temptation to chase returns.

TOP PICKS

ENBRIDGE (ENB.TO)

This is my top income idea. Enbridge is an energy infrastructure company with a lower risk business model. The company has made great strides over the last two years to simplify it structure and strengthen its credit profile. The main overhang on the stock is the Line 3 Replacement project, which was dealt a regulatory set back earlier this year. The stock currently trades at around 10.5 times current year cash flows and provides investors with the potential for an attractive total return over the medium term.

SCOTIABANK (BNS.TO)

This is my number 2 income idea. Scotiabank is primarily a full-service retail bank with operations in North and South America. The bank’s international footprint is a unique differentiator that should allow the bank to reinvest profits at a reasonable rate without taking on excessive risk. Currently, the bank isn’t firing on all cylinders from a profitability perspective, as restructuring and integration initiatives have caused some noise and disappointed investors. The stock is currently trading at less than 10 times current year earnings and provides investors with the potential for earnings growth and multiple expansion over the medium term.

UNITED TECHNOLOGIES (UTX.N)

United Technologies is an aerospace and defence company, but it is really a special situation. The company is an industrial conglomerate with three main businesses that it’s planning on separating over the next year. To complicate matters further, the company is planning on merging its aerospace business with Raytheon after the separation is complete. The business is currently trading at 17-times current year earnings and there has been investor pressure over the years to break up the company and unlock value for shareholders. Each of the company’s operating platforms has unique capital demands and, as separate companies, the valuation of each one can be maximized. The estimated sum of the parts is around $175 per share and this would imply share price upside of about 30 per cent over the next two or three years.