Apr 5, 2018

Mike Newton's Top Picks: April 5, 2018

BNN Bloomberg

Mike Newton , BNN

Mike Newton, director of wealth management and portfolio manager at Scotia Wealth Management
Focus: North American large caps and ETFs

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MARKET OUTLOOK

Elevated volatility has gripped global markets in recent weeks, with the latest bout of selling pressure dragging them back to the lows of early February. In this iteration, fears over escalating trade tensions between the U.S. and China and government intervention in the American technology sector are at the centre of market concerns. I see global economic growth easing slightly from the red-hot pace of late last year to a still-impressive above-trend pace, thanks to solid employment, income growth and supportive policy settings.

Predictability over the past 12 months quickly turned to confusing unpredictability. Everyone is having a difficult time maneuvering in these markets. With risks up, so are my cash levels. Having said that, I suspect that over next several weeks we’ll see equity flows returning to positive territory as the market forges a bottom at or near current levels. We will watch with great interest if investors return to growth-oriented names or if much-out-of-favour value stocks (including the Canadian S&P/TSX Index) finally “catch a bid” and put together a sustainable rally.

The only thing that would concern me is if earnings growth estimates come into jeopardy because of the escalating trade war. I believe that most of the Trump rhetoric is bark rather than bite and intend on using my cash levels to nibble as the situation plays out. I’m completely conscious of the fact that there could be more downside for equities, especially if the initial belief that these trade tensions can be wrapped up in a civilized way does not come to fruition. This continues to be a strange and frustrating period for the financial markets. Risk must be managed on an individual position basis, but it’s important not to make rash investment decisions based on fear at times like these.

TOP PICKS

ISHARES FRONTIER 100 FUND ETF (FM.US)
Most recent purchase on April 4 at US$35.20.

Emerging market stocks are arguably the only asset priced near fair value while also offering up potentially double-digit forecasted returns. Emerging market funds have gotten off to a solid start this year, and set to repeat continued strong performance from last year. In the negative environment of the past four weeks, a noticeable standout was the iShares MSCI Frontier 100 ETF. The $770-million fund, which invests in countries including Argentina, Vietnam, Kuwait and Morocco, has been predominately positive, seemingly ignoring major stock market malaise.

ARISTA NETWORKS (ANET.N)
Most recent purchase on Feb. 16 at US$258.

Arista Networks is one of the most innovative companies in the hyper-scale cloud space. Arista has seen its revenue increase more than tenfold over the past six years. The shares corrected back in February on overly bullish expectations, which is when I increased my position. In the crowded technology space there’s one item in particular that stands out for me: Arista's top leadership consists of Silicon Valley legends who own about 25 per cent of the shares. Growth in the international segment accelerated over 150 per cent year-over-year versus the broad company growth of 51 per cent. Analysts (who know much more than I do about the space) believe Arista can continue to grow 35 per cent longer term, which is quite impressive.

SMARTCENTRES REIT (SRU_u.TO)
Most recent purchase on April 4t at $29.

SmartREIT owns a 32 million square feet portfolio of predominantly unenclosed retail properties in Canada. Its single-largest tenant is Wal-Mart, which accounts for 26 per cent of rental revenue. Portfolio revenue is split between Ontario (60 per cent), Quebec (15 per cent), B.C. (9 per cent), Alberta (4 per cent), Manitoba (4 per cent), Saskatchewan (3 per cent), and Atlantic Canada (5 per cent). While near-term internal growth may fall short, the long-term value creation pipeline remains compelling as $3 billion of mixed-use projects is expected to be built over the next five years. Although the weak retail sentiment and perceived bond-like features have shrunk its relative premium to well below average, I see good value. I recommend building a position here and enjoy the 6 per cent yield as the story turns around.

Headlines may portray a different story, but fundamentals in Canadian retail portfolios have actually improved. While challenges remain in select segments, demand growth from restaurants, liquor stores and fitness centres is providing a strong offset and expanding consumer draw. In addition, successful retailers are beginning to understand that “bricks” are a critical piece in solving the last mile equation.