Full episode: Market Call for Wednesday, July 24, 2019
Michael Sprung, president of Sprung Investment Management
Focus: Canadian large caps
Global trade conflicts are beginning to impact economic outcomes in very fundamental ways. The disruption is evident in both the bond and equity markets.
In the second quarter, markets reflected the fear and uncertainty investors are facing. This has been most evident in bonds, with 10-year U.S. Treasury notes repeatedly indicating expectations of economic growth are diminishing. The equity markets have reacted with greater volatility in pricing, as market participants continuously adjust directions to often conflicting data.
We’re in the eleventh year of what has been the longest economic expansion in modern history. In part, credit must be given to the overly accommodative monetary policies of the global central banks following the financial crisis. These policies have allowed the developed economies to partake of a sustained period of tightening labour markets in an environment of low inflationary pressures. While politicians may have thought that they’ve discovered the elixir to defeat the business cycle, there have been excesses and imbalances percolating below the surface, not the least of which are massive debt levels in both the public and private sectors. With the prospect of slower economic growth, central banks are likely to continue to restrain rates.
A big concern is that if central banks in developed nations respond to a recession threat with massive fiscal and monetary stimulus, it could lead to a result similar to Japan in the ‘90s: three decades of low growth, low rates and even larger deficits (this would still be preferable to a total meltdown). While we don’t believe the business cycle has been defeated, we don’t think that a protracted period of stagnant growth needs result from policy initiatives. Technology is accelerating change and productivity enhancements are likely to follow.
Several clients were raising cash, or taking tax losses at year-end and positions were sold in Manulife, ARC Resources, Vermilion, Precision Drilling, Canadian Natural Resources, Suncor, Encana and Newmont Goldcorp. In March 2018, we sold a portion of our exposure to NFI Group at $58.60. In June, asset mix rebalancing triggered some minor sales of Royal Bank, Scotiabank, Manulife, Cae Inc. and Suncor. One-half the Cae position was sold at $35 in June 2019. We sold Enercare on Aug. 1, 2018 at $28.87 when Brookfield Infrastructure offer emerged.
Last purchase on June 24 at $6.39.
Encana is a leading North American oil and gas producer focused on the Montney, the Permian and the STACK/SCOOP resource areas. Since closing on the Newfield acquisition earlier this year, investors will be focused in the company's expertise in exploiting these assets. Encana continues to make progress in shedding non-core assets. Over the past few years, management has drastically reduced operation expenses and improved efficiencies. The stock is severely undervalued in the market as investors have all but abandoned the energy sector over the past few years. Eventually, we believe they’ll recognize the company’s ability to throw off free cash flow from its extremely well managed assets.
ALARIS ROYALTY (AD.TO)
Last purchase on June 24 at $19.50.
Alaris invests in a diversified range of North American private companies with the objective to generate cash flows to support dividends to shareholders. Over the past few years, the company has worked through a number of issues with a few investee firms that presented some challenges. During this period, investors became concerned as to whether these workouts were taking the focus away from capital deployment. Despite these issues, the dividend was maintained. Alaris is back on track, deploying funds in new opportunities. We anticipate that the payout ratio will decrease over the next few years as cash flows increase. The stock is attractively valued and yields around 8.1 per cent at current levels.
TC ENERGY (TRP.TO)
Last purchased on December 2015 at $46.63.
TC Energy is one of the largest energy infrastructure companies in North America, focusing on natural gas and liquids pipelines and energy (mainly power generation). Its key gas pipeline assets of over 67,000 km include the main Alberta gas gathering system (the NGTL), the Canadian Mainline, ANR, Columbia Gas and Mexico. Its liquids pipeline network includes the Keystone pipeline system. The company’s energy business consists of 10,000 megawatts of generation capacity in Canada and the U.S. and 118 billion cubic feet of unregulated gas storage. That said, it has announced the sale of its U.S. merchant power portfolio. The recent sale of its stake in the Northern Courier Pipeline further adds to TC Energy’s progress in deleveraging the balance sheet. The company is working to develop $25 billion of near-term secured growth projects. It sees an 8 to 10 per cent dividend growth per year out to 2020. At current prices, the stock is yielding 4.5 per cent.
PAST PICKS: JULY 16, 2018
MANULIFE FINANCIAL (MFC.TO)
- Then: $23.74
- Now: $24.30
- Return: 2%
- Total return: 7%
ARC RESOURCES (ARX.TO)
- Then: $14.45
- Now: $6.50
- Return: -55%
- Total return: -52%
- Then: $42.67
- Now: $51.59
- Return: 21%
- Total return: 26%
Total Return Average: -6%