If you focus on 20 to 30 very high quality companies you will outperform indices: Portfolio manager
The new year is just around the corner and many portfolio managers are preparing their investments to withstand any surprises that could head their way in 2023.
This past year, investors have had to navigate a number of variables like a rising rate environment, volatile swings in commodity prices and the growing risk of a recession, to name a few.
Andrew Pyle, senior portfolio manager and senior investment advisor at CIBC Wood Gundy, said he sees “broad-based recession taking hold in the first quarter” and he thinks that “North American benchmark equity indices have not yet seen the true bottom.”
“Employment and consumer metrics are not yet showing the deterioration necessary to drag services inflation to levels that would allow the U.S. Federal Reserve and Bank of Canada to take their feet off the brake pedals,” Pyle said over email on Dec. 29.
“Against this backdrop, I don’t think it’s unrealistic to potentially seen another 10 to 15 per cent shaved off the Dow Jones Industrial Average and TSX (Toronto Stock Exchange).”
But Rob Tétrault, senior investment advisor and senior portfolio manager with the Tetrault Wealth Advisory Group at Canaccord Genuity Corp., said he thinks markets will “be much higher in 12 and 24 months from here.”
“We think it is quite possible that there will be lots of volatility in the short-term. We may not be done yet with the bad news and the fear,” Tétrault said over email on Dec. 8.
“That being said, given how strongly we feel about medium-term outlook, we cannot afford to be in cash or not to be invested. It is too costly as an opportunity cost to potentially miss this rally.”
The TSX closed the trading day up at 19,485.89 on Dec. 29. The main Canadian index has so far posted a negative return of 8.5 per cent year-to-date.
Pyle said 18,000 will be a critical support level for the TSX, “but if it is broken in January, alongside weak fundamental data and earnings, we could test down to below 17,000.”
“That gets you back to December 2020 levels, at which point we would be buyers,” he added.
“I expect to see the TSX back up to around 21,000 by end of 2023 – representing a modest seven to eight per cent gain from today (Dec. 29).”
Amid concerns about a possible economic downturn, earnings recession and ongoing high rate environment in the new year, Diana Avigdor, portfolio manager and head of trading at Barometer Capital Management, said investing in the right sector is almost more important than the stocks themselves.
“We will continue to invest in sectors with high-relative strength. Being in the right sector is 80 per cent of your return. Stock selection comes after. So it is important to navigate the sectors right,” Avigdor said over email on Dec. 18.
She added that investors should be defensive in this new and unknown environment.
“So the portfolios (her investments) are likely to remain barrelled between higher beta and lower beta investments,” Avigdor explained.
“We also do not shy away from having very high cash levels, should it be warranted.”
On a short-term basis, Tétrault thinks investors should be looking to value plays.
“I believe that value plays will continue to run up relative to growth stocks,” he said.
“Canadian dividend payers are likely good places to be while you wait for the tech rally to start again.”
STOCKS TO WATCH
Avigdor suggests that investors keep an eye on Eli Lilly and Company in the new year.
“The two main growth drivers (for Eli Lilly) are Tirzepatide, for diabetes and obesity, and Donanemab, a compound for Alzheimer's,” she said.
“They address large unmet needs in multi-billion dollar markets.”
She also recommends watching Alimentation Couche-Tard Inc. due to its attractive valuation, fuel margins, and mergers and acquisitions (M&A) potential.
For investors looking to invest in technology, Pyle recommends OpenText Corp.
“Stock (OpenText) should improve alongside the general tech space in 2023 and has already seen a slow and steady recovery from its low in early November,” he said.
“Uncertainty over when it would close its acquisition of Micro Focus International plc dragged on the stock, but this looks likely to happen early in the New Year.”
Pyle also thinks portfolio managers should take advantage of growing rental property demand by investing in Boardwalk Real Estate Investment Trust.
“While the stock doesn’t pay a huge dividend in the space, rental demand is going to remain strong with a shift out of housing due to affordability and prospect for further price declines,” he said.
“Could see the stock move back towards the $60 area over the course of the year.”
At the closing bells on Thursday, Boardwalk REIT shares were at $49.08.
Despite ongoing energy supply and demand uncertainty, West Texas Intermediate futures are still up more than four per cent for the year.
Avigdor said she is exposed to commodities heading into the new year and favouring energy and copper.
“Those sectors (energy and copper) have experienced very low investment in the past years and there are supply and demand imbalances,” she said.
“We are cognizant of the fact that a deeper and longer than expected recession might hurt this sector, but we are very disciplined sellers and should those sectors experience unacceptable weakness we will promptly exit.”
She isn’t the only one with her eye on energy, with Tétrault saying he thinks the sector has room to run.
“I don’t believe the oil and gas story is finished and strong Western Canadian companies could have phenomenal years ahead,” he said.
Stock disclosures: Andrew Pyle does not personally, or have family members that hold shares of OpenText or Boardwalk REIT. He does hold them in clients’ portfolios or funds. Diana Avigdor does not personally, or have family members that hold shares of Eli Lilly or Alimentation Couche-Tard Inc. She does hold them in clients’ portfolios or funds.