Full episode: Market Call for Monday, January 13, 2020
Darren Sissons, vice-president and partner at Campbell, Lee & Ross
Focus: Global and technology stocks
Markets are still being heavily driven by central banks as they continue to resist the business cycle following its natural course. The return to quantitative easing by the U.S. and the broader accommodative monetary policies in play across most major OECD nations suggest interest rates will continue to be lower for longer. Fixed income will therefore remain a challenging category while the outlook for equities remains positive.
During the last 10 days, speculation was high over the likelihood of a war in the Middle East. While the U.S. drew first blood, Iran’s initial retaliation demonstrated they have the capability to strike America’s strategic assets across the Gulf. This led to a softening of the White House’s tone and calls from the Trump administration for a broader multilateral Iranian response. However, the erroneous downing of Flight 752 offered proof to all, and especially to Canadians, of the collateral damage international tensions create. Hopefully, cooler heads prevail. From a market perspective, a political risk premium is now once again being priced into oil. Additionally, military contractors are likely to see an inflow of orders.
Perhaps the one area of growing structural risk is the continued buying by ETFs of a relatively small universe. Major corporations and high-growth companies alike attract sizable buying volumes from the multitude of ETF providers. The ETFs generally own the same names, so investors should consider the benefits and risks of coordinated high-volume ETF buying and selling.
ETFs are now collectively major shareholders of a relative small investment universe. When new funds flow in, ETFs all buy the same names (high demand) at the same time, causing upward price surges across their addressable investment universe. But as we saw in December 2018, when funds flow out, the ETFs all sell (high supply) at the same time which exposes investors to sizable downward swings. Increasingly, a logical business case can be made to counter ETF ownership risk through diversifying (modest or otherwise) away from highly concentrated ETF-owned companies.
AUTOMATIC DATA PROCESSING (ADP NASDAQ)
Last purchased at $171.08.
ADP is a dividend aristocrat (that is, it’s raised its dividend for 25-plus consecutive years). The dividend currently yields 2.12 per cent and has grown in Canadian dollars at an average annual rate of 12.2 per cent yearly for 15 years. It’s the leading global human capital management company, and its product offerings include payroll services, benefits administration, talent management, HR management, time and attendance management, insurance services, retirement services and tax and compliance services.
HSBC HOLDINGS (HSBC NYSE)
Last purchased at $42.40.
HSBC’s dividend currently yields 6.7 per cent. While the bank cut it in 2009 (like most banks), it has almost doubled in Canadian dollars since then, growing at an annual average rate of 4.5 per cent.
HSBC is cheap by historical standards, as it’s marginally more expensive than its most inexpensive average valuation range in the last 20 years. A positive Brexit outcome will remove the European political overhang on the stock. From a fundamental perspective, the balance sheet is strong and net profit has grown by 3.4 times from its trough Financial Crisis level of C$5.8 billion to C$20 billion in 2018.
VODAFONE (VOD NASDAQ)
Last purchased at $18.62.
Vodafone’s dividend currently yields 4.8 per cent. The company is somewhat of a deep-value turnaround story with sizable upside. In recent years it has been plagued by Brexit political risk, but that should end this month. Additionally, challenges with its Indian operations due to the competitive pricing pressures from Mukesh Ambani’s Reliance Jio haven’t helped. The future looks better though, as Vodafone has merged its Indian operations with Idea Cellular to combat the pricing pressure.
On July 31, it completed the acquisition of Liberty Global’s operations in Germany and the Czech Republic, Hungary, and Romania for a total enterprise value of €18.4 billion. Management believes the company is now significantly undervalued. They are on record noting that should the market continue ignoring the inherent value of its large tower portfolio, they will spin the towers out into a public vehicle. The two leading U.S. tower companies trade at price-to-earnings multiples in the 60 range, so any spinout would unlock sizable value for shareholders.
PAST PICKS: JAN. 8, 2019
AIR LIQUIDE (AIQUY OTC)
- Then: $24.38
- Now: $28.04
- Return: 27%
- Total return: 29%
AT&T (T NYSE)
- Then: $31.28
- Now: $38.21
- Return: 22%
- Total return: 32%
SUBSEA 7 (SUBCY OTC)
- Then: $10.96
- Now: $12.21
- Return: 11%
- Total return: 13%
Total return average: 25%