MARKET OUTLOOK:

Reflationary theme outperformance continues at the asset class and the sector level as market participants have begun to accelerate portfolio rotation and repositioning for a different type of environment. 

Investors are begrudgingly using previous highly priced and well-owned leaders in growth and bond proxies as a source of cash and repurposing the proceeds into sectors and companies that are economically sensitive and that have pricing power. Risk comes in many ways and today, inflation is a credible risk to investors for the first time in decades. 

When this type of rotation begins, it challenges well-established beliefs and can take years to run its course. During the last 40 years of secular falling rates and disinflation, investors large and small became increasingly focused and invested in a subset of the market that worked consistently to provide predictable returns. 

During this time, reflationary sectors had only brief cyclical periods of outperformance and often ended in disappointment. As a result, sectors like energy, materials and financials have come to be seen as risky, are relatively unloved and now make up a very small percentage of the SPX compared to previous reflationary periods. 

As inflation and rising rates allow for higher prices for products and services, profits and ultimately dividends, in these sectors are likely to grow to represent a larger percentage of those from the SPX. Fundamentally, revenues and earnings from the materials sector this quarter are on track to be up 35 per cent and 95 per cent respectively. Energy sector revenues are to be up over 80 per cent. 

The investment team at Barometer continues to focus on investing in companies with leverage to the business cycle and rising rates as well as those with rising dividend streams of offset inflationary risks.

TOP PICKS:

Nutrien (NTR TSX)
Nutrien is a top pick for us given the positive agriculture and fertilizer fundamentals. Nitrogen and potash prices are currently sitting at over $300/tonne higher than the start of 2021, and there is a positive lag effect there, which would lead to strong pricing for the next few quarters. Earnings expectations are likely to move higher as currently, analysts are expecting virtually no volume growth and only 100 dollars per tonne over last year. NTR pays a 2.4 per cent dividend that is likely to rise high single digits going forward given strong free cash generation. 

Rio Tinto (RIO NYSE)
Supply and demand for iron ore continues to be favorable as demand firms on infrastructure and capital spending ramps up into re-opening while supply remains constrained. With firm pricing and volumes, free cash flow will likely allow for generous dividends and share buybacks going forward and investors gain protection against inflationary risks as commodity prices are likely to continue to rise with the cycle. 

General Dynamics (GD NYSE)
GD is a tier one defense contractor that operated in four categories including technologies, marine systems, aerospace and combat systems. Revenues are accelerating in marine systems and aerospace as submarines are the main weapon system to project power in the south China sea as well as guided missile destroyers. Government contracts tend to be protected from inflating though cost plus agreements. These are attractive given current environment. Gulfstream business jets are benefitting from a surge in demand form the wealthy who see private travel as safe and predictable. Dividends have grown 10 per cent annually over the past 5 years and are likely to continue. 

PAST PICKS: March 11th 2021

Magna International (MG TSX)

• Then: $91.66
• Now: $81.79
• Return: -11%
• Total Return: -9%

Century Communities (CCS NYSE)

• Then: $63.51
• Now: $64.29
• Return: 1%
• Total Return: 2%

Major Drilling Group International (MDI TSX)

• Then: $7.64
• Now: $9.15
• Return: 20%
• Total Return: 20%

Total Return Average: 4%