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

MARKET OUTLOOK

Last week, we saw widespread COVID-19 panic and significant declines across most markets. However, the markets are missing the broader context, which includes the coronavirus fatality rate versus the annual flu season. The markets are also missing the context around the recovery rate in nations proactively managing the infections via a modern national medicine cabinet, well-equipped medical labs and sufficiently trained personnel.

Sectors of the global economy heavily exposed to retail, travel and trade will suffer a disproportionately high impact from the coronavirus. Investors should be wary of management teams gaming the COVID-19 crisis to re-set earning expectations. Passive ETFs were a disaster for investors last week. Should the markets continue to decline, passive index performance will continue to deteriorate in lock-step with falling markets, that is, no downside protection. Consequently, heavily ETF-owned companies will be adversely impacted while modestly or non-ETF-owned companies should fare better.

The surprise 50 basis point cut by the U.S. Federal Reserve is overkill. It sends a bad message and wasn’t necessary. Further, it effectively reinforces the view that despite the high level of employment in the U.S., its buoyant real estate markets and accretive stock market performance over the last few years, the American economy is still too fragile to absorb an abnormal flu season. A few high-risk, high-reward trades are now emerging. Some of these trades will be successful, but not all.

Overall, the message is this too will pass. While it’s likely a little too early to make large portfolio changes, investors should consider nibbling at the fringes and, if circumstance permit, adding some high-quality franchise to their portfolio.

TOP PICKS

CHOCOLADEFABRIKEN LINDT & SPRÜNGLI PARTICIPATION SHARES (LISP SW)
Last purchased at CHF 6,503.

A great brand with growing franchises in developed and developing countries, Lindt & Sprüngli’s underlying organic growth and infrequent acquisitions have driven a 14 per cent average annual dividend growth in Canadian dollars over the last 15 years. The 15-year annualized total return is 15 per cent in Canadian dollars. The balance sheet is very strong and insider ownership is high, as the employee pension fund owns 20 per cent of the shares outstanding. COVID-19 has provided an opportunistic entry point.

MUNICH RE GROUP (MURGF OTC)
Last purchased at €216.67.

Munich Re is a world-class insurance franchise established in 1880. The company had a strong 2019, so it raised the dividend and continued its annual buyback. The 10-year dividend and total return have generated an annual average growth in Canadian dollars of 4.5 per cent and 1 3 per cent, respectively. It has a global scope of operations, so it’s not just reliant on Europe. Given its pedigree, historical performance, a recurring buyback program and a growing dividend yielding 3.9 per cent, it’s a logical alternative for European investors seeking to avoid negative interest rates on bank deposits or low-yielding European fixed income.

WALT DISNEY (DIS NYSE)
Last purchased at US$119.27.

Disney has a strong franchise of impossible-to-replicate assets. It has a growing dividend currently yielding 1.5 per cent. The launch of the Disney+ streaming service has performed better than expected. The dividend and total return have grown at an annual average rate in Canadian dollars of 20.2 per cent and 18.6 per cent, respectively. COVID-19 fears have hit the stock hard over attendance concerns at its theme parks, but if history is a guide the sell-off is a buying opportunity.

PAST PICKS: FEB. 22, 2019

AUTOMATIC DATA PROCESSING (ADP NASD)

• Then: $153.18
• Now: $160.67
• Return: 5%
• Total return: 7%

ENBRIDGE (ENB TSX)

• Then: $48.67
• Now: $51.64
• Return: 6%
• Total return: 13%

SIAM CEMENT (SCVPF OTC)

• Then: $14.65
• Now: $11.80
• Return: -19%
• Total return: -17%

Total return average: 1%

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