Paul Gardner, partner and portfolio manager at Avenue Investment Management
Focus: REITS, bonds and dividend stocks

MARKET OUTLOOK

The market has been strong so far in 2019, with equities being supported because interest rates have come down very significantly. Lower interest rates support higher stock valuations. The view that the Federal Reserve is going to start lowering interest rates to support the economy has been a significant contributor to the market’s performance so far this year.

How weak is the economy going to get over the next six to 12 months? And how are central banks going to respond? The answers to these questions will determine how stocks finish 2019.

Although unemployment in the U.S. hovers below 4 per cent and is at 50-year lows, the industrial production and manufacturing data has been very weak lately. These sectors of the economy have been hurt by the ongoing trade war between the U.S and China, which is an issue we don’t think will get resolved anytime soon. Retail sales and consumer confidence remain decent, but not great. The U.S. economy is susceptible to a recession if the consumer pulls back their buying intentions or if global growth remains weak.

The Fed has signaled they’re willing to cut rates to ensure the expansion continues and the central bank is desperate to increase inflation expectations. Although at Avenue we believe that this is a mistake, the market will act according to the Fed’s decisions. We will have to wait and see what happens in their July and September meetings. If they cut rates and economic growth recovers, then I think risk assets across the board are going to move higher. But the environment remains very late cycle and interest rates are going to stay low. Hence we believe that investors should remain invested but in a defensive stance. Focus on dividend-paying stocks like REITs and utilities and own some gold and other areas of the market where there is earnings growth like, healthcare and technology.

TOP PICKS

SLATE RETAIL REIT (SRT_u.TO)

This REIT focusses on real estate exposure to grocery-anchored community sites in the U.S. Midwest and Southeast. The yield is above 8 per cent and the REIT does not overdistribute. Even in a recession, these sites should keep up due to its defensive posture.

LEON’S FURNITURE (LNF.TO)

Avenue has had this position since 2004. This stock has given us an annual 8.5-per-cent rate of return over that time period. It’s the best managed company in a tough sector. Soon, it will probably monetarize its real estate assets and the stock will be revalued higher.

ROXGOLD (ROXG.TO)

This gold company has one of the highest-grade deposits in the world. The company continues to execute and has excess cash for buyback of shares. Roxgold trades at 3.4-times cash flow per share versus an industry average of 8.4 times . We think it’s too cheap and valuation should catch up with industry average.

PAST PICKS: JULY 31, 2018

SMART REIT (SRU_u.TO)

• Then: $30.34
• Now: $32.79
• Return: 8%
• Total return: 14%

YELLOW PAGES CONVERTIBLE 8% 2022 BOND (YPGdb.TO)

• Then: $97.31
• Now: $103.99
• Return: 7%
• Total return: 15%

ALIMENTATION COUCHE-TARD (ATDb.TO)

• Then: $59.75
• Now: $80.17
• Return: 33%
• Total return: 34%

Total return average: 21%

WEBSITE: https://avenueinvestment.com/