Feb 16, 2018

Hap Sneddon's Top Picks: Feb. 16, 2018

BNN Bloomberg

Hap Sneddon , BNN

Hap Sneddon, chief portfolio manager and founder at Castlemoore Inc.
Focus: Technical analysis and macro portfolio strategy

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MARKET OUTLOOK

The current market structure reflects a positive pro-growth and rising inflation view with financials, energy, materials, discretionary, industrials and now Canadian technology showing strong relative strength while defensives and interest-rate sensitive sectors such as utilities, bonds and consumer staples show weaker relative strength. The underpinning for this situation is based on expectations on economic data, inflation and major central banks’ rate paths and speed.

On the plus side, housing, jobs, inflation (growth) and earnings data are decent, but there’s more backfilling required as retail sales, total hours worked, real wages and manufacturing come in weak or declining.

The two biggest inputs to price increases — housing and wages — are a bit of a mixed bag, but are generally supportive of growth. In Canada housing sales are down, yet prices are up for the most part. In the U.S., housing has seen a recovery just under or over their 2007 highs depending on the region. Wages aren’t inflationary today, but tight labour markets and minimum wage increases across Canada will work into prices eventually.

Rising rates at the U.S. Federal Reserve (the Bank of Canada is trying its best) were quietly a watershed event eight months ago, well before the markets began pricing them in. Time will tell how this second phase of central bank experiments plays out and if they’re appropriately getting in front of the curve or trying to manufacture investor consensus.

If we’re yet early for rate normalization (that businesses, governments and individuals really can’t handle a steady march higher in rates), there will be opportunities in the next few months in defensive and interest-rate sensitive securities as rates weigh on the market, and eventually, the economic cycle.

In the meantime, pro-growth investment expectations are the primary market driver.

TOP PICKS

NOTE: The selections are three-month selections, and not our regular one-year due to our negative eight-month forecast (give or take a month) for the overall market.

ISHARES S&P/TSX GLOBAL BASE METAL INDEXS ETF (XBM.TO)
Purchased on July 14, 2017 at $11.56.

At the core of the pro-growth investment theme and global central bank rate increases, industrial or base metals offer one of the best upsides in the next six months, as investors grow more bullish on the outlook for supply and demand. Increased infrastructure activity, dwindling stockpiles and low new mine builds provide tailwinds into 2018. Using an ETF reduces individual company execution risk and broadens exposure by region and commodity. Investors seeking alpha may prefer to create a basket of First Quantum Minerals, Hudbay, Sherritt International, Teck Resources and Lundin Mining.

SHOPIFY (SHOP.TO)
Purchased on Feb. 9, 2018 at $155.46.

The tech sector in Canada has been on a steady march higher and recently confirmed that it will continue to be part of the pro-growth rally underway, despite historical evidence that reveals its strength fades late in the cycle. Shopify, a cloud-based, multi-channel commerce platform, had a good quarter with revenues and earnings beating, and guidance on revenue increasing to 46 per cent. Target: $200

JPMORGAN CHASE (JPM.N)
Purchased on Nov. 27, 2017 at $103.83.

JPMorgan reported fourth-quarter 2017 operating earnings per share of $1.76, above the consensus of $1.69, which represents a very decent quarter especially with weakness in trading.

As with our recent Market Call Top Pick, Bank of America, JPMorgan represents best of breed in the universal banking model, and is also expected to show above-average returns. More importantly, the U.S. financial sector ranks high on the monthly data and is quickly climbing back up the weekly data. Target: $125.