Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high-yield bonds 

MARKET OUTLOOK:

Rising interest rates and high commodity prices are starting to negatively impact the economy, most notably residential real estate. Although commodity prices have fallen from their highs, the war in Ukraine is keeping food and energy prices at elevated levels. This, combined with higher rates, leaves consumers with less money to spend. 

With the expectation of continued rate hikes over the next few months, the economy may slip into recession. However, given the persistent labour shortage and pent-up demand due to supply chain issues, we anticipate that a recession would be relatively short-lived.

Despite the plethora of negative news, it is important to note that the economy and the stock market are not always closely correlated. In fact, given the drop in stock prices, investors should be optimistic. The inflation rate appears to be peaking, which suggests that this cycle of rising rates will probably be over by the end of this year. As we look forward to 2023, supply chain bottlenecks should ease, semiconductor capacity is poised to increase and the war in Ukraine will probably be resolved.

Investors should ignore the gloomy prognostications and take advantage of the many opportunities that currently exist.

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TOP PICKS:

JPMorgan Chase & Co (JPM NYSE)
JPMorgan has been the best-run major U.S. money centre bank for years, under the leadership of Chief Executive Officer Jamie Dimon. They are a market leader in most of their businesses and have always maintained a strong balance sheet as well as impeccable risk controls. The company has used its excess profits to expand its core businesses as well as deliver healthy dividend increases and buy back shares. Bank stocks have tumbled this year, and JPM is no exception. Investors today have the opportunity to buy these shares at an extremely low valuation, with a P/E of 10 and a 3.5 per cent dividend yield.

Kraft Heinz (KHC NASD)

Shareholders of Kraft Heinz have suffered over the past few years, due to a management group that was too focused on acquisitions and cost-cutting, which resulted in under-investment in its core brands and hefty debt levels. The company went through a major restructuring to address these issues, which included a dividend cut and the new strategy is starting to pay off. Free cash flow has been used to reduce debt and reinvigorate its major brands (which include Maxwell House, Oscar Mayer and Philadelphia), and the company is poised to resume profitable growth. This is one of the few consumer product companies that still offer exceptional value. The shares trade at a P/E of 14, with a four per cent dividend. Investors should be well rewarded over the coming years.

Smith & Nephew ADR (SNN NYSE)

Smith & Nephew is a global medical device company, specializing in hip and knee replacement products, as well as a number of related products used by orthopedic surgeons. The demand for these products is growing, strongly, due to the aging population. The onset of COVID-19 resulted in the postponement of many elective surgeries, and medical device companies were negatively impacted. Supply chain issues have also been a factor. Revenues declined, and there remains a significant backlog of patients waiting for their operations. We anticipate that the revenue growth will return in 2023. The long-term growth characteristics of this industry caused valuations to be high for these companies. However, due to the aforementioned issues, these shares are “on sale.” This is an opportunity to invest in an outstanding growth business with shares that are depressed due to temporary factors.