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

MARKET OUTLOOK

Sentiment is mixed in both the equity and bond markets. Once again geopolitical and trade conflicts keep rearing their ugly head, with the U.S.-China trade dispute at the forefront of market focus. In both the U.S. and in Canada first-quarter earnings reports have been generally positive, giving them a positive undertone. But trade tensions and the upcoming Brexit deadline have concerned global markets.

Over the past quarter bonds rallied and now sit with lower interest rates. Most central banks have paused in their tightening cycle, the Bank of Canada included. Despite lower interest rates, global inflation rates still (after a decade of easy monetary policy) are low and can’t seem to track higher. An inflation rate above 2.5 per cent would cause concern for North American economies. Avenue is not seeing this happening in the short or medium term. This should provide a positive undertone to both bonds and stocks.

We believe Canada will continue to outperform the U.S. We also believe valuations in energy and the utilities are very low and provide a good entry point. With regards to the bond market, Avenue is neutral. We think investors should be overweight corporate credit, specifically investment grade.

TOP PICKS

INTER PIPELINE (IPL.TO)

Inter Pipeline is currently building the $3.5-billion Heartland Petrochemical Complex, which will help them diversify their main business of pipelines and natural gas processing. The market is concerned about it and that’s been reflected in the price of the shares. We believe their rich 8-per-cent dividend yield with only a 75-per-cent payout allows the company to maintain its distribution policy. The natural gas business is weak, but Avenue believes the company’s share price is disconnected from the fundamentals. Shares should recover over the medium term.

FIRST CAPITAL (FCR.TO)

We believe First Capital’s management and assets are best-in-class in the real estate sector. The recent announcement of its main shareholder Gazit selling down its controlling share coupled with the possible of a conversion to a REIT structure gives the company a few positive tailwinds to its underlying share price. Assets are unique in nature due to its core properties that have defensive community tenants. Coupled with this stability, First Capital has unique growth potential with its intensification strategy in major city hubs such as Toronto, Calgary and Vancouver. The company trades at a discount to its net asset value and Avenue believes it should trade at a premium due to its reorganization announcement and intensification strategy.

ONEX CORP (ONEX.TO)

Onex manages and invests capital in the private equity, public market buyouts and has credit platforms on behalf of its unit holders. The company trades at a significant discount to its net asset value. Normally it should trade at a premium. Its recent two transactions of WestJet and Gluskin Sheff will help offset the company’s large cash drag. Avenue believes the company has a very favourable risk/reward profile. The Onex management have a very strong track record of finding value and enhancing assets through restructuring. Technically it looks like it is about to break out. Onex shares could give an investor a 20-per-cent lift over the next year.

PAST PICKS: MAY 29, 2018

WPT INDUSTRIAL REIT (WIR_u.TO)

• Then: $13.86
• Now: $13.59
• Return: -2%
• Total return: 4%

YELLOW PAGES CONVERTIBLE 8% 2022 BOND

• Then: $96.66
• Now: $101.34
• Return: 5%
• Total return: 13%

BCE (BCE.TO)

• Then: $54.39
• Now: $60.79
• Return: 12%
• Total return: 18%

Total return average: 12%

WEBSITE: avenueinvestment.com