MARKET OUTLOOK:

The world stock markets await for the fall. As we hit new all-time highs in many indexes and speculation is ramped, the market is now trading sideways with a slightly up bias for most instruments. The bond market cannot determine if there is inflation or deflation. The equity markets can’t decide when the Fed will start pulling back liquidity. We also don’t know if the COVID variant Delta will cool off around the world, which leaves investors with a lot of unanswered questions. In this moment, Avenue is focusing on high return of capital business, making sure there is enough cash to deploy in the short term if there is a selloff in the fall. As well, we use the Avenue Tail Protection fund to hedge against systematic risk to the equity markets.

With regards to our bond portfolio, we still are using a large position of real return bonds to take advantage of the current inflation environment. We still believe that inflation will be transitory, while not having a lot of conviction for that view... Corporate credit exposure is mostly in short term bonds.  With the suppression of interest rates worldwide, it makes it very difficult to “get excited” about the bond market. We are still relatively defensive in our duration and exposure to long term interest rates.


TOP PICKS:

iShares Canadian Real Return Bond index ETF (XRB TSX)
We know inflation in the short term will be rising close to 3 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. It is far better value to own a bond that has inflation protection, at this moment, than owning nominal bonds.

Dental Corp Holdings (DNTL TSX)
A consolidation play with consistent cash flow and earnings. This recent IPO is a company that is consolidating the fragmented dental industry. Although the dental community was hit hard with the pandemic closing down most offices, the industry recovered quickly due to pent up demand. Both revenue and EBITDA beat recent estimates on their first quarter results since its IPO. Dental Corp acquired 20 practices in Q2 2021 and reported a robust pipeline of 600 plus opportunities. Part of their growth strategy is to focus on orthodontics insourcing, which gives higher margins. We believe this type of investment will do well over next several quarters due to its defensive nature of its business.

Cenovus Energy bonds 3.60% 2027
These investment grade bonds were upgraded from a credit agency after the Husky acquisition due to better combined leverage. This bond spread still gives the investor a healthy spread of 140 basis points or 1.4 per cent of extra yield. We believe this spread gives Avenue a good risk/return dynamic. Although highly leveraged, this heavy oil producer is generating large amounts of free cash flow. This will allow the company to deleverage quicker than forecast and improve bond fundamentals. We believe that energy prices will stay firm over the next year or two.

• Then: $25.60
• Now: $26.47
• Return: 3%
• Total Return: 4%

Allied Properties REIT (AP-U TSX)

• Then: $42.55
• Now: $43.29
• Return: 2%
• Total Return: 3%

Loblaw (L TSX)

• Then: $70.03
• Now: $88.89
• Return: 27%
• Total Return: 27%

Total Return Average: 11%