Full episode: Market Call for Wednesday, November 29, 2017
Paul Gardner, partner and portfolio manager at Avenue Investment Management
FOCUS: REITs, bonds and dividend stocks
Global stock markets have rallied strongly. Canadian equity markets have been left behind despite strong earnings growth. Despite higher than expected GDP growth in Canada, we expect that Canadian equities will outperform its global counterparts in 2018. Even after saying that, we do believe that growth in the U.S., Europe and Japan will keep the stock markets healthy. Adding to that health is possible tax reform in the U.S., that will allow companies to flow through their tax savings to higher earnings levels. This should create a virtuous cycle in the short term.
The bond market is complicated. Global interest rates have risen away from emergency lending levels and are now starting to normalize. The U.S. bond market has gone in the opposite direction from its Canadian counterpart. The surprise Bank of Canada rate hike creates uncertainty with the Canadian bond trying to “figure out” what to do with high growth and little to no inflation. That being said, current levels make it much safer to own medium-term debt such as five to 10 years. Avenue believes the curve will continue to “normalize” and that reflation will occur in a small measure. Interest rates should be range-bound over the next year. The core belief of low-moderate inflation over the near term is still relevant.
BCE is the largest telecom provider in Canada. We believe BCE has the best in class “pipes” and content. Over the next four years BCE will be delivering Fiber to the home, which will create the best experience for usage and high definition TV. The technology will help deliver next generation 5G technology. Over time capex will decrease, which will enable deleveraging of the balance sheet coupled with higher dividend distributions.
YELLOW MEDIA CONVERTIBLE DEBENTURES 8% 2022
Yellow Media owns and operates a media and media solutions company. It continues to provide phone books. Digital revenue is now more than 70 per cent of their business. Phone book business is decaying every year. This company has substantial free cash flow that helps pay down their debt. Their recent refinancing has alleviated any liquidity constraints. We believe on a risk/reward basis the bonds will give us a nine per cent return over the next few years.
The iPhone is everything for Apple. Its positive reviews and launch on the iPhone 8 and iPhone X has positioned Apple's shares to climb higher. From a valuation perspective, Apple is still inexpensive. If you don't include the US$52 of cash sitting with the company, the price to earnings trades at a reasonable 13x next year’s earnings. Apple shares should grind higher into 2018.
PAST PICKS: MARCH 28, 2017
- Then: $58.91
- Now: $61.86
- Return: 5.00%
- Total return: 7.59%
- Then: $21.44
- Now: $23.49
- Return: 9.56%
- Total return: 11.11%
BAYTEX BONDS 6.625% 2022
- Total return: 8%
TOTAL RETURN AVERAGE: 8.90%
|BTE 6.625% 2022||Y||Y||Y|
Avenue Equity Composite
Performance as of: October 31, 2017
1 Month: 1.4% fund, 2.7% index
1 Year: 10.3% fund, 11.5% index
3 Year: 6% fund, 6.2% index
*Index: TSX Total Return