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

MARKET OUTLOOK

Currently it’s very easy to be pessimistic about the markets. U.S. trade sanctions started a chain reaction of weakness that spread rapidly across the globe. These and other targeted trade-restrictive policies have negatively impacted Chinese growth. In Canada, it’s NAFTA, steel and dairy. In South Korea, it’s Japanese trade sanctions. In Europe, which is heavily dependent on China and broader Asia, it’s weak exports and the fallout from Brexit. Australia is perhaps the most telling global slowdown example, as economic weakness is driving risks of the country’s first recession in 28 years.

Mineral commodities are mostly weak with the exception of gold and oil and gas are priced for Armageddon. 

On the flip side, it’s been interesting to see significant strength in consumer staples over the last 12 months. Typically, when the markets are “risk-off,” the broader defensive sectors rally. In that context, it’s therefore surprising to see significant and persistent underperformance from the telecom and pipeline sectors.

Equally interesting is the large portfolio return spread between growth mandates (absent fixed income) and balanced mandates (40 per cent fixed income). The dire performance of fixed income particularly over the lasted 12 months dragged on balanced fund returns, while growth funds with no fixed income have generally performed strongly. My assumption is the spread between the two mandates range from 6 to 8 per cent, but if growth mandates also include high-beta momentum stocks (FAANGs, cannabis Chinese internet and biotech), the spread is likely closer to 10 per cent. In light of global economic weakness, I would be very surprised if in the not too distant future the return spread between growth and balanced mandates doesn’t narrow significantly and that high-growth momentum stocks don’t increasingly come under pressure.

Looking forward, our base expectation is a recession or a sustained correction not too far in the future. Prudent investors should position their portfolios by trimming or reducing higher risk/reward investments and adding defensive holdings. A cash cushion, while a drag on portfolio performance in the near term, will be a major asset once the markets fall as high-quality companies can then be purchased at better prices with fatter dividend yields.

TOP PICKS

CORNING INC (GLW:UN)
Last purchased at $28.44.

• 2.9 per cent dividend yield.
• Has a diversified business model, with exposure to displays (TV, monitors, smartphones), automotive (interior and windscreens), telco (5G and fibre) and medical.
• Reasonably insulated from tariffs as production is largely done inside the country of consumption for most of its products.
• Major catalysts: the 5G fibre build-out, new product launches and shareholder return targets of over 8 per cent annually driven by dividend increases and buybacks through 2023.

PRUDENTIAL PUBLIC LIMITED (PUK:UN)
Last purchased at $30.60.

• Dividend yield at 3.6 per cent.
• Stock attractively priced despite a history of strong earnings growth due to the twin concerns of Brexit (its head office is in the U.K.) and political concerns around Hong Kong (its Asian headquarters).
• Major catalysts for the stock include the pending spin-out of its U.K. asset management business, higher interest rates and continued strong growth from its Asian and U.S. subsidiaries. 

BRITISH AMERICAN TOBACCO (BTI:UN)
Last purchased at $42.19

• Elevated dividend yield of 7.4 per cent.
• Attractively priced due to the competitive threat from vape products, which now seems overblown given the health concerns vaping products are creating; a U.S. nicotine reduction agenda probably (or not) scheduled 10 years in the future; and unrealistic concerns around the pace of debt reduction given the October 2016 acquisition of the portion of Reynolds it did not already own.
• Major catalyst include the growing safety concerns around vaping products, the company and the broader tobacco category being fund flow receipts when investors look to decrease their risk exposure, it’s deep value attractive to value investors, and income-seeking investors being attracted to the high dividend yield and the 9.4-per-cent average annual dividend increase over the last 15 years.

PAST PICKS: SEP. 11, 2018

HSBC HOLDINGS (HSBC:UN)

• Then: $42.81
• Now: $36.85
• Return: -14%
• Total return: -8%

NESTLE (NSGRY OTC)

• Then: $82.96
• Now: $114.30
• Return: 38%
• Total return: 41%

SUBSEA 7 (SUBCY OTC)

• Then: $13.05
• Now: $10.09
• Return: -23%
• Total return: -22%

Total return average: 4%