Andrew Pink, portfolio manager, LDIC
FOCUS: Canadian large caps, preferred shares, fixed income
Top Picks: Capital Power, StorageVault Canada, Tourmaline Oil
MARKET OUTLOOK:
At this time last year, many investors would not have predicted equity markets would be reaching all-time highs by the second quarter of 2024. The Bank of Canada tightening cycle began in March 2022 when the overnight lending rate was only 0.25 per cent and ended in July 2023 at a terminal rate of five per cent. This 475-basis point move was the fastest tightening cycle in 40 years. What followed was a significant rise in the average household mortgage expense and increased capital lending rates which surfaced significant fears of an impending recession. Instead, a very strong 2023 economy resulted in a soft landing in 2024 characterized by slower, but still positive economic growth.
Worries about a stall in consumer spending amounted to a false alarm. Employment resiliency and growth in real wages brought gains in disposable income. Stock market strength and gains in residential real estate values, aided by liberal immigration policy, significantly padded the net worth of households. At the same time, inflationary trends have normalized to an acceptable two to three per cent growth rate. This dynamic allowed the Bank of Canada to lower rates by 25 basis points in June and we expect continuation of this trend throughout the remainder of the year and beyond. We believe the U.S. Federal Reserve will make its initial cut in September of this year.
Despite political uncertainty, geopolitical tensions, and volatile commodity prices, we see compelling investment opportunities in equity markets. We believe earnings growth will begin to broaden beyond the technology sector, and investors can find opportunities in high-quality companies in other sectors that are trading at reasonable valuations. That said, strong year-to-date equity returns are above historical averages and suggest more muted returns in the back half.
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TOP PICKS:
Capital Power (CPX TSX)
Capital Power is a renewable energy company with a diverse portfolio of power-generating assets spanning across Canada and the United States. The company aligns well with several compelling macro investment themes, including the multi-trillion-dollar global clean energy transition. Management has built a strong balance sheet and has prioritized shareholders in its recent capital allocation and expenditure decisions. By pursuing a growth strategy funded internally, we expect Capital Power to deliver outsized earnings growth in the coming years. We also believe the company will benefit from the substantial clean energy demand associated with Artificial Intelligence. While we previously held shares in the company, shares were sold when the Bank of Canada raised interest rates. In the latest quarter, we repurchased the position as lower interest rates will start to benefit capital-intensive renewable energy businesses.
StorageVault Canada (SVI TSX)
Storage Vault is a unique, real estate operating company with a portfolio of storage facilities in strategic locations across Canada. Storage is a needs-based product for individuals, families, and businesses. SVI is a consolidator in a fragmented industry and provides investors with the prospect of reliable long-term growth. Seasonal rental turnover provides management with ongoing market price discovery which helps support a targeted four to six per cent same property net operating income annual growth rate.
Tourmaline Oil (TOU TSX)
Tourmaline is a natural gas-focused energy producer in the Western Canadian Sedimentary Basin. Natural gas is coming through a period of significant oversupply that has put pressure on the spot price and caused natural gas-focused stocks to decline. With an early start to hurricane season, wildfires disrupting production in western Canada, and recent excessively humid temperatures across North America, we expect this supply dynamic to shift throughout the year and for a stronger market to emerge in 2025 when we begin to see export capacity scale higher, primarily from the commissioning of LNG Canada. TOU is the highest quality natural gas producer in Canada, actively hedges forward production, and can sell into the widest number of markets. We think the current share price offers a compelling entry point for investors wanting to play this theme.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CPX TSX | N | N | Y |
| SVI | N | N | Y |
| TOU TSX | N | N | Y |
PAST PICKS: APRIL 16, 2024
Cenovus Energy (CVE TSX)
- Then: $28.52
- Now: $27.21
- Return:-4%
- Total Return: -3%
Chartwell Retirement Residences (CSH.U TSX)
- Then: $12.59
- Now: $13.26
- Return:5%
- Total Return: 7%
Granite REIT (GRT.UN TSX)
- Then: $72.26
- Now: $75.01
- Return:4%
- Total Return: 5%
Total Return Average: 3%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CVE TSX | N | N | Y |
| CSH.U TSX | N | N | Y |
| GRT.UN TSX | N | N | Y |
