Gavin Graham, contributing editor at The Income Investor Newsletter
Focus: North American and global large caps

MARKET OUTLOOK

With the U.S. Fed now cutting rates after topping out at 2.5 per cent and the ECB reducing its short-term  rate to negative 0.5 per cent and restarting quantitative easing, it's clear that central banks in developed markets worldwide have been panicked by signs of slowing GDP growth. As a result, equity markets have continued their strong rise this year, with the S&P 500 up 18 per cent and the S&P/TSX up 16.5 per cent although they’ve traded sideways in the last couple of months. The U.S. yield curve remains inverted, with Fed funds at 2 per cent after the most recent cut and the U.S. 10-year at 1.75 per cent. This has usually predicted a recession, although the very low bond yields due to 10 years of QE may be keeping long rates artificially low. Over one third of developed markets government bonds now have negative yields, with investors in most eurozone and Japanese bonds guaranteed to lose money.

With trade tensions between the U.S. and China continuing, Germany and Italy in technical recessions, Brexit uncertainty escalating and Chinese growth slowing, investors should continue to take profits on sectors that have performed well such as technology and consumer cyclicals, while maintaining or increasing exposure to rate-sensitive sectors such as pipelines, utilities, REITs and financials, all of which have generally outperformed the indexes this year and provide reasonable dividend yields. The era of what has been described as "profitless prosperity," where loss-making companies such as Tesla, Uber, Lyft and the now shunned WeWork had been able to raise vast sums appears to be coming to an end. With central banks now cutting rates, precious metals such as gold and silver appear attractive and have done well in the last few months.

TOP PICKS

INTACT FINANCIAL (IFC:CT)
Recommended in August 2019 at $127.42.

Intact is the largest property and casualty insurer in Canada with approximately 13 per cent of the total market. It derives 15 per cent of its revenues from the U.S. Intact is consistently profitable underwriting insurance, with a combined ratio of expenses to revenues of 97 per cent (anything below 100 per cent means expenses are less than premiums earned). It has outperformed the industry by almost 6 per cent yearly over the last decade on this measure. While return on equity is respectable at 12 per cent, it’s below its level of a few years ago due to increased competition. Intact recently bought specialty lines businesses Guarantee Company of North America and Frank Cowan from Princeton Holdings for $1 billion, which it expects will lead to low single-digit accretion to net operating income in the next 24 months. It yields 2.4 per cent.

FIERA CAPITAL (FSZ:CT)
Recommended in August 2019 at $10.88.

Fiera Capital is the third-largest independent asset manager in Canada and in the top 100 in North America with approximately $150 billion in assets under management (AUM) at mid-year. Built by acquisitions from its beginnings 15 years ago as the asset management arm of Desjardins, its largest deal was the acquisition of National Bank's asset manager in 2012. In the last year it has bought $10 billion in AUM through the purchase of CGOV, Clearwater, Palmer Capital and IAM, while selling its retail mutual funds to Canoe Financial. Its most recent deal was buying Natixis' $2-billion Canadian AUM while Natixis bought an 11-per-cent stake in Fiera for $128 million from National Bank. Natixis is one of the world's largest asset managers with $1.2 trillion in AUM. Fiera's total return over the last five years including its generous 7.7 per cent yield has been 13 per cent versus -13 per cent for its Canadian peers.

ALTAGAS CANADA (ACI:CT)
Recommended in April 2019 at $18.95.

AltaGas Canada is last year’s spin-off of the Canadian gas and hydro utilities company (AltaGas retains 36.8 per cent). With regulated gas utilities in three provinces, the company has 130,000 customers and a regulated rate base of $885 million. It also owns the 102-megawatt Bear Mountain Wind Farm and 10 per cent of the 303-megawatt North West hydro facilities in B.C. All of its earnings are regulated and its gas operations have return on equity of between 8.5 and 11 per cent, while Bear Mountain and North West Hydro have 25- and 60-year CPI-linked contracts with BC Hydro. AltaGas Canada is rated BBB and has $330 million in capital expenditure planned for the next five years to grow its operations. It yields 4.1 per cent.

PAST PICKS: MARCH 27, 2019

CHOICE PROPERTIES REIT (CHP-U:CT)

• Then: $14.18
• Now: $14.53
• Return: 2%
• Total return: 6%

AGNICO EAGLE (AEM:CT)

• Then: $59.79
• Now: $73.48
• Return: 23%
• Total return: 24%

SAVARIA (SIS:CT)

• Then: $13.69
• Now: $12.35
• Return: -10%
• Total return: -8%

Total return average: 7%