Full episode: Market Call for Tuesday, February 23, 2021
Rob Lauzon, managing director and deputy chief investment officer at Middlefield Capital Corporation
Focus: Global stocks
Although the fight against COVID is still ongoing, equity markets remain supported by three core pillars.
First, COVID infections are falling as we move past the post-holiday surge, multiple areas are starting to ease lockdown restrictions and the vaccine rollout is accelerating in many countries. Johnson & Johnson (JNJ) recently published its highly anticipated Phase 3 clinical trial data. While the headline 66 per cent efficacy was lower-than-expected, the vaccine proved 85 per cent effective in preventing severe disease.
Second, monetary and fiscal policy are expected to remain highly accommodative for the foreseeable future. Interest rates should remain near-zero for years while governments ramp up fiscal stimulus. The new Biden Administration is currently pushing for a US$1.9 trillion relief plan, which includes cheques to consumers, added unemployment benefits, money for states and localities and more funding for a national vaccination program. Biden is calling this the “first step in a two-step plan to build a bridge to the other side of the crises we face.” We believe that the second step will involve plans for historic investments in infrastructure, with a focus on the clean energy sector. Other regions are making similar pledges. For example, Europe is expected to spend nearly €2 trillion from 2021-2027, with more than €500 billion devoted to green projects.
Third, equity market fundamentals are set to improve as the global economy recovers. While internet-based companies have fared exceptionally well throughout the pandemic, many consumer service businesses have suffered. We believe the eventual reopening of the economy will unleash pent up demand in areas such as travel, concerts and other leisure activities. This would support the global recovery and could lead to new highs in the broader markets.
Iberdrola (IBE SM) Purchase at 10.31 Euros Feb 22 2021
Iberdrola is one of our top picks in the clean power space. It is a Spanish utility that is the European leader in wind and solar power, with 19 GW of installed wind and solar capacity. Iberdrola has a healthy growth pipeline which should result in installed capacity rising to 46 GW in 2025 and >95 GW by 2030. The company was gradually building hydro and onshore wind for years but is now accelerating spending and aims to become the world’s biggest producer of green electricity. The company has a good track record of project execution and is pursuing organic and non-organic growth options internationally. Iberdrola was ranked fifth in the Wall Street Journal’s list of the Most Sustainably Managed Companies in the world. The company trades at a premium to its peers but we believe this is justified given its growth prospects.
Enbridge (ENB TSX) Purchased Sept 22 2020 $40.65
A great option for investors looking for income and growth in the energy space. Management continues to believe its asset base will yield organic expansion and optimization benefits for years to come. It is increasingly looking at opportunities to support the energy transition in addition to more traditional projects and share buybacks. We see continued progress on Line 3 as a catalyst to improving valuation of the equity. Construction is set to begin on an offshore wind project in France -perhaps more important, the project demonstrates the company’s ability to secure additional growth projects with clean energy features. It also shows progress towards Enbridge’s commitment to net-zero emissions by 2050.
Alphabet (GOOGL NASD) Purchased at US$2,081 on Feb 11 2021
Still one of our top picks in the Communications sector. Google reported a strong acceleration in Q4’20, with revenue growth >20 per cent at the group level. YouTube and Google Cloud were the standout segments, showing growth of 45 per cent and 46 per cent, respectively. The core business is effectively back to pre-COVID levels, and that is with travel still depressed (down >50 per cent). This provides significant upside to the global re-opening trade. YouTube is diversifying its revenue into subscriptions, with more than 30-million subscribers for Music and Premium. Google Cloud and Other Bets are still losing money but we remain optimistic for their prospects over the long-term. In our view, the market is still undervaluing Waymo, which is a leader in autonomous vehicles, and Deep Mind.
PAST PICKS: January 28, 2020
TransAlta Corporation (TA TSX)
- Then: $9.73
- Now: $11.62
- Return: 19%
- Total Return: 22%
Xylem (XYL NYSE)
- Then: $81.27
- Now: $98.30
- Return: 21%
- Total Return: 23%
Equinix (EQIX NASD)
- Then: $602.57
- Now: $661.94
- Return: 10%
- Total Return: 12%
Total Return Average: 19%
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