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

MARKET OUTLOOK

The Donald Trump presidency continues creating havoc in the markets. His fascination with tariffs is theoretically flawed: They’re blunt instruments that ultimately raise prices for the consumer and are not value-added income as he’s incorrectly remarked. In the near term, the tariffs and the U.S. technology ban are hurting China, with growth slowing and political pressure mounting on Chinese President Xi Jinping. But Trump will face the same pressures shortly, as the U.S. enters an election cycle in 2020 with his trade war and tariff strategy having raised prices for consumers and having lowered U.S. economic growth.

Other areas of concern include U.S. interest rate policy, which last June was extremely hawkish. The more dovish 2019 U.S. interest rate outlook is now a headwind for fixed income and defensive sectors. Real estate is also a concern following the enactment of “cooling measures” by many developed nations, including Canada.

Big Tech and the high-growth, high-beta FAANGs segment are increasingly exposed to the growing threat of antitrust legislation. The U.S. 1980s telco antitrust breakup is a case study investors may want to revisit.

In global markets, Europe remains on sale for Canadians given the inexpensive euro and depressed prices across the region. Asia and China are also on sale, with investors having fled the region largely due to the trade spat. Portions of the fixed income proxy market are on sale, such as telcos, utilities and preferred shares. Oil remains deeply out of favour, with European oil majors offering good value at these levels.

Given the above and as I’ve mentioned in prior appearances, adding a defensive tilt now to portfolios makes sense, as does adding assets to out-of-favour sectors.

TOP PICKS

BP PLC (BP NYSE)

• Oil is on sale again, but BP is not economically disadvantaged by landlocked and trapped oil and gas reserves.
• BP’s U.S. refining assets benefit from buying inexpensive Canadian crude and refining it at their U.S. facilities, which positively impacts margins.
• The balance sheet is strong. Costs have been optimized for profitability below US$50 per barrel, so dividend increases and buybacks should be expected over time.
• Dividend yields 5.9 per cent and is sustainable at current prices.

MUNICH RE (MUV2 ETR)

• Munich Re is a Germany-based reinsurer that’s active across the globe.
• Earnings catalysts include the recent loss experience in the catastrophic risk market (hurricanes, floods), which has led to capital exiting the sector. Rates are also climbing in auto coverage, which has a hard market with strong pricing.
• Munich Re is a discounted investment opportunity for Canadian investors seeking insurance exposure as the CAD/EUR exchange rate trades at a sizable discount to historical levels.
• Current dividend yield is 4.20 per cent.
• Munich Re regularly raises its dividend, buys back stock and has generated an annualized Canadian dollar total return of 10.2 per cent yearly for 15 years.

VODAFONE (VOD NASD)

• Vodafone has been on sale since the Brexit vote. Political ineptitude and positioning by U.K. politicos is creating opportunity for investors.
• The company is buying the Liberty Media’s European assets, subject to regulatory approval, which will be accretive to earnings. 
• The performance of the sizable Indian subsidiary will improve over time, but it’s currently facing headwinds as its Ambani family-funded competitor prices telco services at uneconomic levels to capture market share. To date, the Ambanis have spent US$40 billion chasing market share, but will ultimately raise prices to generate a return on their investment.
• The company has balance sheet optionality, as the Towers assets could be disposed of for a sizeable gain. Debt levels will decline on higher earnings after the Liberty acquisition. Should this deal not get regulatory approval, the dividend cut triggered to fund the acquisition will prove overly conservative, thereby supporting dividend increases in the future.
• Dividend yields 6.3 per cent.

PAST PICKS: MAY 11, 2018

CKI INFRASTRUCTURE HOLDINGS (1038 HKG)

• Then: $62.95
• Now: $63.65
• Return: 1%
• Total return: 8%

GENERAL ELECTRIC (GE NYSE)

• Then: $14.60
• Now: $10.12
• Return: -28%
• Total return: -26%

ALGONQUIN POWER (AQN TSX)

• Then: $12.99
• Now: $16.14
• Return: 24%
• Total return: 31%

Total return average: 4%