Full episode: Market Call Tonight for Thursday, April 25, 2019
Darren Sissons, vice-president and partner of Campbell, Lee & Ross
Focus: Global equities and technology
In the last 18 months it has become increasingly obvious an asset allocation revisit is now appropriate. What has worked since the financial crisis most likely won’t work moving forward.
What has changed? Monetary policy as the sole arbiter of economic planning has reached its best-before date. It’s increasingly become an ineffectual tool that benefits the “haves” and punishes the “have-nots.” Central banks’ money-printing has created sizable asset bubbles in real estate and equities through quantitative easing (QE). The mere risk of further rate hikes and expectations of continued withdrawal of U.S. QE funds threatens to unravel those bubbles as the December sell-off demonstrated.
Central banks both in Canada and abroad, however, understand the lack of higher rates has created sizable unintended consequences such as political populism, significant income inequality and other social ills. It’s therefore inevitable rate hikes will happen. It's not a matter of “if,” but “when.”
Believing this time is different is unwise. A better approach is to revisit portfolio asset allocation decisions with a forward-looking view. Investors need to consider whether their portfolio equity income is sufficient for their future needs. Is your portfolio overly reliant on potentially unsustainable, high-yielding equities? Investors should also ask themselves which end markets they want exposure to and what geographies make sense longer term. On fixed income, investors need to consider whether their portfolio is positively or negatively exposed to rising interest rates and whether their current fixed income strategy is sensible given the longer-term rate outlook. The final question you should be asking yourself: What’s going to make markets, stocks and fixed income work moving forward?
Now is a good time to reflect on your portfolio’s strengths and weaknesses. A disciplined approach to asset allocation is prudent, practical and sensible and should be a core function of every investor’s portfolio management process.
LINDT & SPRÜNGLI PARTICIPATION SHARES (LDSVF.PK)
Last purchase at 6,675 Swiss francs.
This company’s dividend has grown at an average of 13 per cent in Canadian dollars for 10 years and currently yields 1.5 per cent. It offers a relatively inexpensive discretionary consumer product in a growth category. Growth catalysts include new store openings, improved U.S. market performance and growth in both developed and emerging markets. It has a strong balance sheet as cash reserves effectively greater than all liabilities outstanding. It’s also currently executing a 500 million Swiss franc (C$670 million) share buyback program. The company has excellent operating metrics, as revenue and net income have grown at an average of 7.7 and 11.4 per cent respectively for 10 years.
SHINHAN FINANCIAL (SHG.N)
Last purchase at US$38.03.
Shinhan’s dividend grew at 23 per cent annually in Canadian dollars in the last five years and currently yields 3.5 per cent. The company is a leader in the South Korean banking market. Its recent acquisition of 60 per cent of Orange Life (previously ING Korea) with the option to buy the remaining 40 per cent is an earnings growth catalyst and will boost non interest earnings. It also has a growing presence across Asia: the company generated 14 per cent of its net income from international operations in 2018. Excellent financial metrics, strong balance sheet and dividend upside as payout ratio is only 24 per cent. Given macropolitical risks over North Korea, trade tensions and the emerging market correction, the company is priced at a steep discount of only at 0.57 times book value compared to Canadian banks, which trade at a substantially higher price-to-book of 1.3 times.
SUNCOR ENERGY (SU.TO)
Last purchase: $44.02.
Suncor is a rarity among Canadian energy producers, as the dividend wasn’t cut but rather grew at an average of 14.6 per cent since 2013; it’s currently yielding 4.9 per cent. The diversified nature of its operations has proven defensive despite the steep discount of Canadian oil and the multi-year crude price volatility. It offers attractive market-leading Canadian (integrated) operating metrics, including the highest netbacks per barrel of oil equicalent, the lowest gas production among all large-cap energy companies, the best production per share growth profile and the highest cashflow margin among all integrated names.
PAST PICKS: APRIL 4, 2018
- Then: $ 54.84
- Now: $60.05
- Return: 10%
- Total return: %16
KUEHNE & NAGEL (KHNGF.PK)
- Then: $154.20
- Now: $145.26
- Return: -6%
- Total return: -2%
MUNICH RE (MURGF.PK)
- Then: $237.65
- Now: $248.34
- Return: 4%
- Total return: 13%
Total return average: 9%
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