MARKET OUTLOOK:

Central bank policy errors remain a key risk for the markets. To hedge that risk, Jerome Powell, the chairman of the U.S. Federal Reserve, is on record noting a 50bps interest rate rise is likely in March 2022. 

We, however, believe the 50bps positioning is marketing and sets the stage for minimal market pushback should a 25bps raise in March ultimately be executed. The Bank of Canada is likely to follow a U.S.-led rate rise. We do not see it acting independently of U.S. central bank policies. 

The threat of higher interest rates has been a catalyst for market rotation. COVID success stories and meme stocks, in particular, saw large declines since peaking in early 2021. Should interest rates rise as expected, further downside for those stocks is likely. 

Value stocks and financials have been beneficiaries of the threat of higher interest rates and should continue to benefit if rates do rise. COVID recovery trades including energy, as mentioned in prior appearances, should also provide leadership moving forward. 

The BoC under Tiff Macklem’s leadership has exercised impactful moral suasion despite limited execution. Market participants believed the tough talk on rates and did not punish the Canadian dollar for the January failure-to-launch rate rise. 

Looking forward, higher U.S. interest rates will support higher Canadian interest rates and a higher Canadian dollar against major trading partners excluding the U.S. The Canadian dollar is also highly priced currently and while a benefit to Canadians investing offshore it hurts the export sector.  

Given the above, the marching orders are clear. 1) Begin rotating portfolios into areas that will benefit from higher interest rates and inflation. 2) Re-evaluate fixed income exposure vis-à-vis the pending negativity from rising interest rates. 3) Use the strong Canadian dollar while we have it (note: currency strength seldom lasts) to buy inexpensive quality in non-North American markets. 4) Add exposure to COVID recovery plays.   

TOP PICKS:

Shell (SHEL NYSE)
Last bought at $54.68
It is the very definition of a COVID recovery play i.e., return to work, travel and industry returning to pre-COVID utilization levels will drive carbon consumption and an improving financial performance. 2) A growing renewables business, which includes hydrogen, wind and solar will expand meaningfully across a multi-year horizon. 3) COVID forced business model changes, which lowered operating costs, improved the balance sheet and heightened shareholder returns. Shell is currently projected to buyback 6 per cent of shares outstanding in 2022. 4) At current oil prices, free cash flow is an eye-popping 17 per cent. 

Disney (DIS NYSE)
Last bought at $149.24
A surprise COVID winner, which benefitted from the streaming service. 2) Should benefit from further COVID re-opening i.e., theme parks, cruises, and movie theatres. 3) Yesterday’s quarterly update highlighted the streaming service strength, which is outperforming Netflix on new account adds. 4) It is attractively priced for long term investors. 4) The dividend should be re-introduced as the economy normalizes.

Visa (V NYSE)
Last bought at $209.74
A structural growth franchise that benefitted during COVID but which should see meaningful upside from broader COVID exits across the globe. 2) Visa will benefit from inflation due to higher average transaction prices. 3) Excellent underlying fundamentals i.e. revenue and profit grew at an average annual rate of 8.3 per cent and 11.7 per cent in Canadian dollars over the last five years. 4) Visa has retired an average of 4 per cent of shares outstanding since 2017. It announced a new US$12 billion buyback in December 2021.

PAST PICKS: January 15, 2021

Alibaba (BABA NYSE) 

• Then: $243.68
• Now: $125.65
• Return: -48%
• Total Return: -48%

Linde PLC (LIN NYSE) 

• Then: $258.09
• Now: $308.38
• Return: 19%
• Total Return: 21%

Medtronic PLC (MDT NYSE) 

• Then: $116.81
• Now: $105.53
• Return: -10%
• Total Return: -7%

Total Return Average: -11%