Douglas Kee, chief investment officer of Leon Frazer & Associates
FOCUS: Canadian dividend stocks
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MARKET OUTLOOK

Our initial 2018 global economic forecast looks for continued strength with GDP growth of 3.5 to 4.0 per cent. While Chinese and Indian growth should remain above 6 per cent, we expect some moderation in China given a slowing of infrastructure spending and more restrictive lending policies. Japan and Europe should grow in the 2.5 per cent area, the best rate for this economic cycle. U.S. growth could be as high as 3 per cent given strong employment growth, improving housing, higher capital expenditures and the early benefits of proposed tax reform. Canada should benefit from export growth to the U.S. and Asia, but will be challenged by a slowing housing market.

To date, inflation has not been an issue this cycle, but with employment growth and labour shortages in some areas we should see some wage pressure moving inflation closer to the 2 per cent area. We expect the U.S. Fed and Bank of Canada to continue raising rates in 2018 and Europe to follow in the second half. The outlook for business remains constructive with economic growth leading to revenue growth and higher earnings. We are looking for around 10 per cent earnings growth in the U.S. and 5 to 7 per cent growth in Canada. Our valuation range for the S&P/TSX Composite is 14,600 to 17,500. We remain fully invested and are committed to companies that provide current income and the potential for an increasing dividend stream in the future.

TOP PICKS

BANK OF NOVA SCOTIA (BNS.TO)
We are our maximum allowable weight in Canadian banks. Banks continue to provide exposure to a growing global economy, will benefit from higher interest rates and are expected to return value to shareholders through growing dividends and share buybacks. BNS shares have sold off recently due to soft Q4 results. Scotia has a strong and efficient retail network in Canada and more profitable and growing retail business in Latin America and the Caribbean. The stock currently yields 3.8 per cent and we expect dividend growth of about 5 per cent in 2018.

SUN LIFE FINANCIAL (SLF.TO)
Sun’s core insurance business in Canada and the U.S. is steadily growing with the cash flow being reinvested in higher growth markets, primarily in Asia. SLF shares are essentially flat year to date due to ongoing, but recently slowing, redemptions in the U.S. mutual fund business (MFS) and the lack of upside in interest rates. We expect Sun Life will benefit from rising interest rates and positive investment flows in 2018. The stock yields 3.5 per cent and SLF increased its dividend by 8 per cent in 2017.

AGRIUM (AGU.TO)
Shares of AGU have traded sideways in 2017 reflecting flat fertilizer demand and the outcome of the proposed merger with Potash Corp. It is now expected that the merger will close late this year or early next. The new company Nutrien should benefit from modest improvements in fertilizer demand, potential cost synergies of $400 to $500 million and equity investment sales netting approximately $4.5 billion. With low debt, the sale proceeds can be used for retail acquisitions, a steady less volatile business and share buybacks. AGU shares currently yield 3.3 per cent and we would expect dividend growth in the medium-term.

PAST PICKS: JANUARY 5, 2017

NORTHLAND POWER (NPI.TO)

• Then: $23.51
• Now: $23.72
• Return: 0.89%
• Total return: 5.16%

TD BANK (TD.TO)

• Then: $67.81
• Now: $72.46
• Return: 6.85%
• Total return: 10.63%

ROGER COMMUNICATIONS (RCI’B.TO)

• Then: $52.67
• Now: $66.04
• Return: 25.38%
• Total return: 28.40%

TOTAL RETURN AVERAGE: 14.73%

WEBSITE: www.leonfrazer.com