Darren Sissons' Top Picks: April 4, 2018

Darren Sissons, vice-president and partner at Campbell, Lee & Ross
Focus: Global equities and technology

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MARKET OUTLOOK

Global equity returns in the next few years will be driven by higher interest rates and total returns, policy changes, and sector rotation.

HIGHER INTEREST RATES AND TOTAL RETURNS

U.S. quantitative easing is finally coming to an end as is the era of cheap money. This long-overdue policy change is resulting in higher interest rates in the U.S. Some nations are also raising rates as we’re doing here in Canada, while others, such as the Eurozone, are expected to do so in the not too distant future.

Higher rates raise the cost of doing business and increase the cost of personal consumption. Debt, especially for companies with substantial leverage, becomes an increasing challenge in a higher rate environment. The unintended consequences of rising rates is low growth; high-yielding companies will progressively fall out of favour with investors as savers now have alternatives to invest their capital.

Given the above, we’re now seeing a widespread selloff of high-yielding dividend stocks. Across the globe, telecom, consumer staples and utilities (the heroes of the post-financial crisis) are seeing their share price fall (in some cases substantially so), which then leads to a sizable dividend yield. 

We’re of the opinion that the high dividend yielding selloff represents a significant wealth creation opportunity for investors, especially for clients focused on total return and low portfolio turnover.

POLICY CHANGES

U.S. trade policy under the Trump administration has taken on an ugly America-centric, anti-trade, anti-foreigner rhetoric. While the merits of anti-trade can be debated at length, the likelihood of the U.S. being a net winner in a trade war is very low. Additionally, history has proven time and again that wars, a trade war in this case, can be won, but seldom when fighting multiple foes (real or imagined) on multiple fronts.

Well capitalized companies with sustainable business models negatively impacted by geopolitical driven policy changes will be wealth generating catalysts for contrarian investors.

SECTOR ROTATION

Progression through the economic cycle is often reflected in the rise of and fall of sectors of an economy. At the bottom of a recession safe, defensive stocks are in vogue as investors fear for the safety of their capital. Progression through the healing process typical translates into an investor movement away from safety towards modest growth (consumer discretionary and industrials) and finally into growth sectors as the economy approaches full employment. The market is now fully embracing growth. Companies such as the FANG group, many pockets of technology and emerging markets are now generally over-owned with stretched valuations.

For those with the ability to “time the markets,” growth companies likely offer additional upside from current market levels. For conservative investor, now is likely the time to start repositioning some funds into defensive holdings.

A WORD OF CAUTION

Be wary of crowded trades. The investment themes that are widely known and broadly embraced by the retail investor in particular seldom, if ever, deliver the returns expected.

TOP PICKS

BCE (BCE.TO)

BCE currently yields 5.5 per cent, which is at the higher end of its 20-year average dividend yield range. The dividend has grown at an average of 5.4 per cent  per year for 15 years. The Alarm Force acquisition is accretive, provides differentiation vis-à-vis competitors and positions the company for a greater slice of the consumer telecommunications spend.  The sell-off of high-yielding stocks has been overly aggressive and has provided an attractive entry point for this Canadian national champion. 

KUEHNE & NAGEL (KHNGF)

The company is a leading global logistics player. It offers exposure to global air, rail, road and sea freight markets. It currently yields 4 per cent and pays the occasional special dividend. Dividend has grown by an average of 18 per cent per annum in Canadian dollars for 15 years.  They have a very strong balance sheet. Trump trade war propaganda has provided a discounted entry level for opportunistic investors, as the stock has corrected by 20 per cent since the U.S. announced a new trade policy agenda.

MUNICH RE (MURGF)

This Munich, Germany-based company is the leading European reinsurer. It provides additional insurance capacity to other insurance companies by buying a portion of their insurance exposure. Like most financials, overly zealous regulatory clampdowns and ultra-low interest rates since the onset of the global financial crisis have lowered their returns. Rising interest rates and a more benign regulatory environment moving forward are now alleviating those concerns. The dividend currently yields 4.7 per cent and has grown by an average of 14 per cent for 15 years in Canadian dollars. Total return considerations typically include an annual buyback program and a dividend increase. The company has a strong balance sheet and proven risk management expertise. This is a Germany, pan-European exposed reinsurer with a global scope of operations.