David Driscoll, president and CEO of Liberty International Investment Management
Focus: Global stocks

MARKET OUTLOOK

The S&P ended up with a total return of 31 per cent in 2019. This was the second-best year for the market since 1997 and similar to market returns in 2013 (up 29 per cent). Unlike in 2013, however, profits in 2019 dropped; all the market upside came from multiple expansion.

In 1998, the U.S. Federal Reserve delivered 75 basis points of “insurance cuts” and the S&P 500 rallied by 27 per cent and valuations exploded like in 2019. Price multiples expanded from 18 times earnings to 23 times and accounted for nearly all the index return. Back then, Russia defaulted on its sovereign debt and the hedge fund Long-Term Capital Management collapsed because most of its investments were in Russian bonds.

Treasury yields fell from 5.8 to 4.7 per cent and, as a result, technology stocks rallied (up 77 per cent) and accounted for 35 per cent of the index return. As a result, the FOMO (fear of missing out) trades are back in vogue, as are momentum traders. This explains the rapid rise and fall of Tesla shares in just five weeks.

FOMO is also happening in the bond market, as junk bond yields (non-investment grade bonds rated “BB” or worse) hover under 3 per cent. To provide some comparison, they yielded 16 per cent during the Financial Crisis. Clearly, the risks on these securities far outweigh the rewards.

Investors would be well advised to hold some cash in reserve if this market runs out of energy and begins to topple. Our current holding of cash is 20 per cent times the equity weighting. For clients who are 100 per cent equities, they are 80 per cent invested and are holding 20 per cent cash. For clients with a 60/40 stock and fixed income asset mix, the holdings are 12 per cent cash, 48 per cent equities and 40 per cent fixed income.

TOP PICKS

PAYCHEX (PAYX NASD)
Last purchased on Jan. 28 at $89.33.

An American provider of human resource, payroll, and benefits outsourcing services for small- to medium-sized businesses, Paychex has enjoyed new growth from a higher client base, higher price realizations and increased product penetration of its suite of solutions, particularly time and attendance, retirement services and human resources outsourcing. Recent jobs growth numbers from the U.S. are a boost, as Paychex services mostly companies of 50 employees or less.

CHUBB (CB NYSE)
Last purchase on Jan. 28 at $152.33.

A global provider of insurance products covering property and casualty, accident and health, reinsurance, and life insurance, Chubb is the largest publicly traded property and casualty company in the world. In its recent quarter, underwriting premiums were up 9 per cent and its combined ratio (claims versus premiums written) fell from 91.5 to 90.3 per cent in 2019, thanks to higher prices and fewer catastrophe payouts. Book value was up 12 per cent. These are among the best metrics in the industry and Chubb carries an “A” credit rating.

OPEN TEXT (OTEX TSX)
Last purchase on Jan. 28 at $60.86.

Open Text is a Canadian company that develops and sells enterprise information management software. It recently purchased Carbonite, a leading provider of cloud-based subscription backup, disaster recovery, endpoint security and threat intelligence. Since 2012, Open Text’s cloud business has grown 30 per cent compounded annually. The company hopes this acquisition will be a game-changer.

PAST PICKS: JAN. 17, 2019

DANAHER (DHR NYSE)

• Then: $105.57
• Now: $161.99
• Return: 53%
• Total return: 54%

NV5 GLOBAL (NVEE NASD)

• Then: $67.10
• Now: $62.51
• Return: -7%
• Total return: -7%

TELEPERFORMANCE (TEP FRA)

• Then: $142.80
• Now: $237.60
• Return: 66%
• Total return: 68%

Total return average: 38%

WEBSITE: libertyiim.com