Ryan Bushell, president and portfolio manager of Newhaven Asset Management

FOCUS: Canadian dividend stocks

MARKET OUTLOOK:

Looking ahead to 2024, we maintain a cautious stance. The economy has become increasingly reliant on fiscal policy to remain buoyant in recent years. Bullish observers point to strong gross domestic product (GDP) data from the third quarter as a signal of the economy's underlying strength. We would counter that this strength largely comes from running historic deficits in both Canada and the U.S. at near full employment, leaving little room for further compensation if the economy deteriorates.

Additionally, the long and variable lags from monetary policy tightening have yet to fully affect consumers and businesses who were able to fix debt at low rates for longer periods. Still, more impact is felt with each passing month. This is a more pressing issue in Canada given the faster cadence of mortgage renewals. Upbeat equity market sentiment seems out of step with the fundamentals described above. 

Financial markets largely cheered the release of the U.S. Federal Reserve’s “dot plot,” which included three 0.25-per-cent interest rate cuts for 2024. Consensus estimates almost immediately doubled the Fed’s forecast to six 0.25 per cent cuts for 2024 without forecasting a corresponding recession. In our view, the consensus forecast is too optimistic. Similarly, at the beginning of last year, consensus estimates were for interest rates to be lower by year-end without significant economic weakness. We were resolute that you would not see interest rate cuts without pain in the economy and we were proven correct as short-term interest rates rose 0.75 per cent in Canada and a full one per cent in the U.S. in 2023. 

We expect a similar backdrop this year, inflation is still running at levels that would have been unthinkable just five years ago. It will be difficult to ease policy aggressively in the back half of the year with the U.S. presidential election looming. Additionally, government bond issuance in the U.S. is set to nearly double in 2024 to just under US$2 trillion, pressuring rates higher across the maturity spectrum. If we see significant easing from central banks in 2024 it is unlikely to be a cheerful event, and if interest rates remain at or near current levels, the economy and financial markets will continue to be starved of liquidity. Caution is warranted given current valuations.

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TOP PICKS:

Arc Resources (ARX TSX)

Commodity prices have softened recently and Arc has experienced a reasonable pullback below the $20 level. Short-term we may see more weakness as commodity prices could experience further downside given the warm winter and ongoing economic uncertainty. Medium to longer-term, Arc Resources is poised to experience significant organic growth driven by demand from various export projects including the Trans Mountain Expansion (diluent) and LNG Canada. We like the shares under $20 with a long-term view.

Manulife Financial (MFC TSX)

Manulife announced an important transaction on their U.S. long-term care business that was above expectations. Although there is still work to do, the shares are breaking out of a more than decade-long trading range. We have a relatively cautious view on the economy and the market for 2024, so the organic opportunity in Manulife, combined with a solid technical floor is appealing, as is the five-per-cent dividend yield.

Northland Power (NPI TSX)

Northland Power was one of our worst-performing holdings in 2023 despite several encouraging transactions to reduce risk and shore up funding plans for upcoming projects. The concern surrounding the slate of development projects is understandable but overblown, leaving the company in much the same position it was nearly a decade ago when few believed they could execute on growth projects. The company has a strong execution record of accomplishment. With financing largely secured, we feel the negative sentiment surrounding renewable development has brought about a sizeable buying opportunity, especially if the shares retreat to the lows in the months ahead. The company is worth watching at current levels.

PAST PICKS: April 11, 2023

Pembina Pipeline (PPL TSX)

Then: $45.09
Now: $45.55
Return: 1 per cent
Total Return: 6 per cent

Aecon (ARE TSX)

Then: $13.42
Now: $13.84
Return: 3 per cent
Total Return: 8 per cent

Altagas (ALA TSX)

Then: $22.88
Now: $28.54
Return: 25 per cent
Total Return: 29 per cent 

Total Return Average: 14 per cent