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

MARKET OUTLOOK

The markets continue their recent run of heightened volatility. The 2018 fourth quarter sell-off was largely driven by a risk-off sell-down after the Fed rate hike in December. The markets then quickly transitioned to risk-on when the central bank suggested no rise was warranted in January and increases moving forward would likely be less frequent than previously guided. On balance, we had a significant sell-down in December and a sizable recovery, with generally only interest-rate sensitive sectors such as preferred shares currently underwater.

Based on prior behavior, it’s highly likely Trump will pull the rug away in March to maintain trade war pressure on China, largely to keep his followers’ support and eventually claim a moral victory on what is essentially a lose-lose commercial strategy for both nations. The market is not pricing in a failed March trade negotiation, so a sell-off would be expected. China is experiencing significant economic pain, so despite the pain the U.S. itself is going through, keeping the pressure on will likely eke out gains for the Trump administration on intellectual property, market access and trade volumes. 

Another area of volatility we’re watching closely includes the Iranian oil export exemption which was granted by the U.S. in 2018. Their elimination or a further curtailing of the Iranian export capacity would likely spike WTI and Brent oil prices as OPEC and Russia, the two largest oil exporting groups, have already commenced supply reduction efforts. Any decrease in oil supply will naturally tighten oil prices and one would think that would benefit Canada at the margin.

Emerging markets have rallied strongly since January. The surge has been driven by a number of factors such as a manufacturing diversification away from China, political cycles for some countries, prior interest rate increases and perhaps most significantly the re-assertion of the “lower-for-longer” U.S. interest rate policy by the Fed.

Given the above, it’s not surprising to see global blue chips rallying somewhat as a number of fund managers add defensives at the margin. It’s also not surprising to see that the higher-beta sectors such as technology have softened since Q3/18 and have yet to fully recover last year’s highs.

TOP PICKS

AUTOMATIC DATA PROCESSING (ADP.O)
Last purchased at $132.23.

1. 44 years of consecutive dividend increases.
2. The tilt into the small- and medium-sized business segment is showing promise and should be a catalyst for stronger organic growth moving forward. 
3. The substantial client float is a net beneficiary of rising interest rates.
4. Strong balance sheet.
5. Automatic Data Processing has generated an annualized 13.4 per cent total return in Canadian dollars over 15 years.

ENBRIDGE (ENB.TO)
Last purchased at $48.09.

1. Enbridge is a serial dividend-raiser currently yielding an elevated 6.2 per cent
2. The highly leveraged balance sheet after the sizable Spectre acquisition has now improved. This positive change resulted in a debt ratings upgrade in Q4/18. Enbridge should see leverage continue to fall over the next two years.
3. The removal of the master limited partnership (MLP) structure was unfortunate, but has resulted in a cleaner corporate structure. Enbridge is currently priced at an attractive entry point as the debt concerns and confusion over the MLP structure removal led to a significant share price decline and a substantial deviation from its long-term valuation metrics.
4. The company has generated an average annualized total return of 14.2 per cent over 15 years.

SIAM CEMENT (SCVPF.PK)
Last purchased at 470 Thai baht.

1. The dividend, currently yielding 3.8 per cent, has grown at an average annualized rate in Canadian dollars of 9.2 per cent for 15 years.
2. The chemicals portion of the business has underperformed since late 2016 and is now staging a recovery. The cement business continues to benefit from solid growth in Thailand and its broader pan-Asian footprint. The logistics business continues to perform well.
3. Siam Cement has strong long-term-oriented shareholder support as the Thai royal family’s investment arm owns 33 per cent.
4. The completion of the Long Son Vietnamese chemical plant should lift earnings moving forward.
5. This Thailand blue chip industrial offers investors a relative low risk way to leverage the high-growth ASEAN region.
6. The company generated an annualized Canadian dollar total return of 15.4 per cent over 15 years.
    

PAST PICKS: JAN. 31, 2018

AIR LIQUIDE (AIQUF.PK)

• Then: €108.55
• Now: €109.25
• Return: 1%
• Total return: 3%

TD BANK (TD.TO)

• Then: $74.82
• Now: $76.41
• Return: 2%
• Total return: 6%

SGS (SGSOF.PK)

• Then: CHF 2,503
• Now: CHF 2,542
• Return: 2%
• Total return: 5%

Total return average: 5%

WEBSITE: clrim.com
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