Nov 8, 2018

Darren Sissons' Top Picks: Nov. 8, 2018

BNN Bloomberg

Darren Sissons , BNN Bloomberg

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

MARKET OUTLOOK

Every day, I wake up and wonder: “what has Mr. Trump done today?” Given the political machinations of the current administration and its winner-take-all Make America Great Again agenda, it’s been a difficult year in the markets, with the TSX down 5 per cent for the year. Fed Chair Jerome Powell has increased global pain, with higher U.S. interest rates strengthening the greenback at the expense of most of the country’s trading partners. The next U.S. interest rate raise is expected in December, which will further strengthen the U.S. dollar and will support continued outflows of liquidity (cash) from Asia, Australia, Canada and Europe to the U.S. Collectively, these twin American policies are depressing valuations and currencies across the globe while strengthening the dollar and raising valuations for many U.S. companies.

A surface-level analysis would suggest the U.S. is clearly the main market to invest in. But a somewhat deeper analysis tells us that rising interest rates and tariffs on foreign goods and services must surely raise the cost of doing business in that country. It must also eventually decrease the competitiveness of U.S. companies in both domestic and international markets versus their foreign competitors. When valuations of quality Asian, Australasian, European and Latin American companies are viewed alongside their U.S. peers, they’re typically cheaper. Given the above, using the strong U.S. Dollar to invest in inexpensive non-U.S. securities over a three to five year timeframe (or using our overvalued Canadian dollar to invest in those same markets) should be a catalyst for improved portfolio performance.

Catalysts needed for better global equities performance:

Asia, Australasia, Europe and Japan need to begin raising their interest rates to defend their currencies and liquidity levels.
Non-U.S. companies need to take advantage of the significant competitive advantage provided by their weakened currencies vis-à-vis the U.S. dollar to harvest increased profitability from the U.S. market.
For countries already in a rate hike cycle such as Thailand, Indonesia and Canada, their central bankers must temper the need to defend their currencies and liquidity needs against weakening their own domestic demand and export competitiveness through higher domestic interest rates.
Oil must stay below US$85 per barrel. Otherwise, global demand will slow.

TOP PICKS

CK INFRASTRUCTURE (CKISY.PK)
Last purchased at HKD 62.00.

4.1% dividend yield.
It has a Strong balance sheet, which supports its growth-by-acquisition strategy.
The acquisition of Australia’s APA Group and its gas and electrical assets (pending regulatory approval in Q1/19) will expand the company’s global infrastructure portfolio.
The company is inexpensively priced due to Brexit concerns over its British portfolio of regulated assets. It has grown net income and its dividend in Canadian dollars by 6.7 and 7.8 per cent respectively for 15 years.

DANONE SA (DANOY.PK)
Last purchased at €66.49.

3.02% dividend yield.
The 2016 Whitewave acquisition, which included soy, protein shakes and kale products, expanded its U.S. presence outside dairy and has been a catalyst for better growth.
The company’s relatively new CEO, Emmanuel Faber, continues to make progress on re-accelerating earnings growth.
It’s inexpensively priced, especially considering our strong Canadian dollar.
Danone has a history of accretive long-term growth, increasing its net income and dividend by 6.3 and 8.3 per cent respectively for 15 years in Canadian dollars.

PRUDENTIAL PLC (PRU.N)
Last purchased at $42.17.

It has a growing dividend, with a current yield of 3.66 per cent.
It has well-balanced portfolio, with a mature cash cow in its U.K. business, a growing U.S. annuity-driven business under the Jackson National banner and a high-growth pan-Asian business headquartered in Hong Kong.
The company is spinning out its U.K.-based asset management business, which should be a positive catalyst for shareholder value.