David Burrows, president and chief investment strategist, Barometer Capital Management
FOCUS: North American large caps
Top Picks: Imperial Oil, Sprott Physical Gold Trust, JP Morgan
MARKET OUTLOOK:
The tightening cycle has ended and easing monetary policy has begun globally. Based on employment data, earnings revisions and credit markets, it looks most likely that the U.S. Federal Reserve has engineered a soft landing. The Barometer team continues to believe that equities, and in particular, dividend payers and growers with pricing power are the preferred asset class for investors.
We began a new cyclical equity bull market in January 2024 as U.S. equity markets made new highs and through the summer, markets broadened to include sectors and smaller companies that previously had been underperforming. While the bond market has been performing better since the October lows, attracting record inflows, dividend payers have significantly outperformed as an alternative for income investors. Gold has also become a preferred holding in balanced accounts as a stable asset. It has been less volatile than treasuries and up over 20 per cent on the year. Barometer believes this outperformance is likely to continue especially now that we have entered a liquidity cycle.
Of note, Barometer went to a one-third tech weight over the past four months as markets broadened. Financials have been a 25 per cent weight across the firm most of the year along with significant overweight in industrials and large-cap Canadian energy producers. In spring the team added utilities, pipes and residential REITs to the portfolio mix.
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TOP PICKS:
Imperial Oil is an integrated producer with long-life assets a rock-solid balance sheet and operational excellence. The ongoing significant share buybacks and dividend growth is likely to provide investors with total return and inflation protection. The five-year dividend growth has had a compound annual growth rate of 23 per cent and the balance of free cash flow is being directed to share buybacks. Technically, the energy sector exited a long bear market and is likely to enjoy multiple expansions over the next few years.
Sprott Physical Gold Trust (PHYS TSX)
Gold has once again become a preferred option for holding central bank reserves over the past three years. In a world where fiscal spending and easy policy have been dramatically increasing government debt levels, treasuries have become less attractive in many jurisdictions. In the past three years, gold has provided balanced investors with a hedge against inflation and has become less volatile than a treasury bond for the first time in 45 years. Investors in general have been sellers of gold despite its new found outperformance and this low positioning could reverse, creating additional demand.
A long-time favourite of the Barometer team, JP Morgan is the highest-quality bank in the world. By avoiding the financial crisis in 2009, JP Morgan has continued to build on its lead in the sector. The best leadership and people, the strongest market share, the best technology platform, the strongest capital base and industry leading dividend growth make it a must-have in portfolios. Financials have been leading markets higher since the beginning of this bull market and owning the leader provides attractive risk/reward.
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
IMO TSX | Y | Y | Y |
PHYS TSX | Y | Y | Y |
JPM NYSE | Y | Y | Y |
PAST PICKS: JANUARY 29, 2024
Canadian Natural Resources (CNQ TSX) (2 for 1 stock split 6/11/24)
- Then: $42.83
- Now: $46.92
- Return:9%
- Total Return: 12%
Teck Resources (TECK.B TSX)
- Then: $54.37
- Now: $60.67
- Return:11%
- Total Return: 12%
iShares MSCI Japan ETF (EWJ NYSEARCA)
- Then: US$66.17
- Now: US$70.26
- Return:6%
- Total Return: 7%
Total Return Average: 10%
DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
---|---|---|---|
CNQ TSX | Y | Y | Y |
TECK.B TSX | Y | Y | Y |
EWJ NYSEARCA | Y | Y | Y |