Rick Stuchberry, portfolio manager at Wellington-Altus Private Wealth
Focus: Canadian large caps and international ADRs

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MARKET OUTLOOK

We're more concerned about the bond market and the rising rate environment than the stock market’s correction. We continue to view the bond market as weak, and see it as getting weaker over time. We think that any investments trying to copy the bond market will suffer, and any investment benefiting from the growth in rates will outperform. From the election of Donald Trump until now, yields have climbed from 1.40 per cent to 2.80 per cent: a doubling. We see rates continuing higher.

We don’t see ourselves changing the investment layout of the portfolios. With a backdrop of rising interest rates, we will first focus on safety. The first approach is to ensure the balance sheet is clean and debt levels are low. If you owe nothing, rising rates won’t impact you, so you can focus on other more important aspects of you: you’re safe. 

The second approach is growth. Companies with bad balance sheets are stuck in defense over the next few years, so we’re focusing on the good balance sheets and the offense. The best balance sheets in the market are in the tech sector and so are the best growth prospects. Many companies have revenue growth of over 20 per cent, which means they double in size every five years or less. The stocks may dance up or down, but with that backdrop fundamentals are great for longer-term holdings. The next beneficiary is still financials: if you owe a lot of money, and money becomes more expensive, the bank will make more going forward.

When bonds sell off, bond proxies with high dividends struggle, as they’re proxies for bond investments. Here is the 10-year yield over a year versus the utilities index:

Conversely, many assets are completely uncorrelated to bonds and don’t struggle in this environment.

UPDATES: We chose to exit Loblaw. We lost confidence in their growth plan. 

TOP PICKS

ROYAL BANK (RY.TO)

In a rising rate environment, it’s important to own financials. Royal is the leading Canadian financial. We see both higher profits and dividend increases in their future.

TENCENT HOLDINGS (0700.HK)

Tencent is one of the leading Chinese tech companies. They’re growing at over 50 per cent annually, have some of the largest internet communities on earth and multiple strong business lines. As more of daily life moves online, Tencent will continue to dominate in China.

COUCHE-TARD (ATDb.TO)

Half of Couche-Tard’s locations are in the U.S., so they will benefit from the tax reforms. Those locations will be more profitable and they’ll pay off their acquisitions sooner. We see a business that should be Amazon-proof, with continued growth and a deleveraging balance sheet.

PAST PICKS: JUNE 9, 2017

DEUTSCHE BANK (DB.N)

• Then: $17.67
• Now: $14.29
• Return: -19.10%
• Total return: -19.10%

TWILIO (TWLO.N)

• Then: $24.64
• Now: $41.68
• Return: 69.19%
• Total return: 69.19%

SPIN MASTER (TOY.TO)

• Then: $39.00
• Now: $46.63
• Return: 19.56%
• Total return: 19.56%

Total return average: 23.21%

TWITTER: @stuchberrygroup
WEBSITE: wellington-altus.ca