David Burrows, president and chief investment strategist, Barometer Capital Management
FOCUS: North American large caps
MARKET OUTLOOK:
The thesis that the Barometer Investment team continues to work with is that low interest rates and the reversal that took place at the COVID-19 low in March 2020 marked a regime change. The change marks a pivot from a roughly 40-year period of disinflation to a new long cycle of reflation. This change effectively means that investors have to look through a different set of lenses than they have over the previous four decades.
Groups facing a headwind include longer dated fixed income, real estate, high multiple growth stocks including technology and defensive assets like utilities and consumer staples. Each of these groups are broadly owned and could face selling pressure for an extended period.
On the other hand, shorter duration assets that benefit in a reflationary environment and are more cyclical may offset rising rates though stronger near-term earnings and cash flow, which may also provide a rising dividend stream.
Groups benefitting from the current reflationary environment are financials, in particular banks and insurance companies; industrial companies including defense companies and machinery companies selling into the re-onshoring and infrastructure trend. Also materials producers benefitting from the EV rollout, shifting of global supply chains and lack of domestic investment over the last cycle. Reflationary environments also tend to favour global markets that have a more significant exposure to financials, materials and industrials.
In the near term, investors continue to grapple with headwinds from a U.S. Federal Reserve tightening cycle, which is aimed at slowing the pace of expansion in these price sensitive industries. However, the market has been pricing the risk of overtightening for over a year. It appears to the team at Barometer that while there are real challenges for some important index stocks and sectors, that the broad market likely bottomed in October 2022 and now correcting some of the initial rally.
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TOP PICKS:
We like JPM as a reflation beneficiary. As rates move higher in the U.S., the income JPM earns from lending has moved higher as well. The bank has seen net interest income expand almost 50 per cent between fourth quarter 2021 and fourth quarter 2022. Net interest margin has expanded substantially as well moving from 2.28 per cent to 2.24 per cent. As rates move structurally higher and the yield curve normalizes, we expect JPM to continue to benefit. With consumer and business credit quality remaining stronger than expected throughout 2022 and into 2023, JPM should benefit from their higher loan growth. Capital return to shareholders is a priority for JPM. Having hit its CET1 target last quarter, it has resumed its buyback program in first quarter 2023. The stock pays a 2.8 per cent dividend and a five years dividend growth rates of 13 per cent.
STANTEC - is a North American engineering consultant, with half of its business exposed to the U.S., which will allow it to greatly benefit from the theme of onshoring as well as the $1 trillion infrastructure rollout. This is evident from its most recent update, as it expects to see a meaningful uptick in organic growth, driving the strength of its backlog related to the infrastructure stimulus and the continued push in environmental services. We expect this stimulus to be a strong tailwind for the next couple years, with additional upside stemming from acquisitions to increase scale into favourable end-markets. Stantec currently sits with a strong balance sheet, and has a history of consistent high-single digit increases to its quarterly dividend.
ATS Corporation is a compelling industrial company that focuses on automated manufacturing systems in three key segments; life sciences, transportation and consumer goods. The company has been increasing its exposure to electric vehicles within its transportation segment and has recently announced numerous contract wins with one key North American auto manufacturer. We believe ATS will benefit from the theme of “reshoring,” the return of manufacturing to domestic markets, as well as increased automation within supply chains as companies look for ways to mitigate risks that became evident during the pandemic. ATS also has the ability to expand its EV business with further contract wins with other global auto manufacturers. The company’s management team has been in place for the last six years and has continued to gain creditability within the market due to strong operational excellence and successful execution on strategic mergers and acquisition opportunities. The company’s backlog currently sits at a record high, providing strong revenue visibility for next six quarters.
PAST PICKS: February 9, 2022
Nutrien (NTR TSX)
- Then: $95.28
- Now: $105.73
- Return: 11%
- Total Return: 13%
Rio Tinto (RIO NYSE)
- Then: $78.33
- Now: $68.75
- Return: -12%
- Total Return: -2%
General Dynamics (GD NYSE)
- Then: $215.44
- Now: $232.77
- Return: 8%
- Total Return: 10%
Total Return Average: 7%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| NTR TSX | Y | Y | Y |
| RIO NYSE | Y | Y | Y |
| GD NYSE | Y | Y | Y |
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