Paul Gardner, partner and portfolio manager at Avenue Investment Management

FOCUS: REITS, bonds and dividend stocks

MARKET OUTLOOK:

It’s a tale of two markets. The stock market will continue to push higher despite the valuation issues of being too expensive. Profitability of S&P companies were up 22 per cent from last year, giving the stock market even more momentum. That being said, the market is going to have to get comfortable with higher bond rates. As mentioned it’s a tale of two markets, and the bond market after selling off (higher yields) so far this year has reached a settled point where the next move could be large to the upside or downside when referring to yields. We know inflation in the short term will be moving higher. We know that the economy once fully out of the pandemic will run hot. The biggest question is in 2022/23 “Will there be sustained inflation or back to the secular deflation that we have seen over the past two decades”? 

At this point It is still too early to tell if inflation (and higher bond yields) is coming from a short term supply/demand problem where supply chains have been severely disrupted during 2020/2021, or does the global economy return to its secular decline in inflation. At this point of the cycle, we believe the bond market is in neutral territory. Slowly we are increasing our duration in our bond portfolio. With regards to the equity market, we believe the rotation from growth to value, from “stay at home stocks” to “old technology stocks” will continue. We also believe that gold and their underlying stocks will find a strong bid in 2022, coupled with the U.S. dollar being weak. We believe Canadian markets will continue to outperform the U.S. markets due to valuation differences, as well as its constituents being weighted towards cyclicals.

TOP PICKS:

iShares Canadian Real Return Bond Index ETF (XRB TSX)

We know inflation in the short term will be rising close to three per cent due to base effects, higher production prices for manufacturers and commodity price increases. We are not sure if this is a transient issue or more permanent. This index fund provides bond exposure but with a hedge towards inflation.

Allied Properties REIT (AP-U TSX)

This REIT suffered during the COVID crisis due to everyone working from home. The REIT mostly owns brick and beam sites that have smaller tenants. We believe that the office market, although weak, will return stronger over the course of the year. We have heard indications that the “stay-at-home worker” does not benefit at home. People are getting tired of the novelty. Although we will see a change to a more hybrid solution on office work protocols, we do believe that leasing has increased and prices have stabilized. This is one the best run REITS in Canada and at Avenue we believe that the REIT is cheap and should trade at a premium of its NAV.

Loblaw (L TSX)

Loblaw worked well as a defensive stock during the worst of the pandemic since it was considered an essential service. The ongoing move towards online purchases of groceries will continue. Loblaw is more than ready to respond to this shift. Food inflation is generally a tail wind for grocers profitability. The recent announcement of selling Weston’s bakery has given a bid to Loblaw stock.  We believe margins will slightly increase due to the new mix of online purchasing.

PAST PICKS: January 12, 2021

Cargojet (CJT TSX)

• Then: $217.85
• Now: $174.61
• Return: -20%
• Total Return: -20%

Boardwalk REIT (BEI-U TSX)

• Then: $34.37
• Now: $37.23
• Return: +8%
• Total Return: +9%

Berkshire Hathaway (BRK/B NYSE)

• Then: $233.03
• Now: $262.44
• Return: +13%
• Total Return: +13%

Total Return Average: +1%