Zachary Curry, president and portfolio manager at Davis Rea
Focus: North American large caps


Key equity and bond market indicators are pointing to a possible slowing in the global economy. This is a big change from three months ago, when global growth was moderating but still looked very healthy. Global manufacturing is downshifting more than expected, notably in China and the U.S., where the tariff increases are having an impact, as well as in Europe. Weakness is evident in the global auto sector, where many years of easy financing and incentives have exhausted vehicle sales. Both the U.S. and Canada face greater capital spending pressures from weaker energy prices. The global, U.S., and Canadian economies could slow more than expected, and the risk of a recession has increased. Bigger declines in earnings growth and additional weakness in commodity prices will be a result.

Falling energy prices and slowing economies will contribute to only moderate inflation in 2019. This, along with weaker economies, implies that short-term interest rates won’t be increasing in 2019. Increased recession risk suggests that any change in rates is more likely down than up over the next six to 12 months. Government bond yields are likely past their highs and will likely be flat-to-lower over 2019.

After more than two years of rising earnings expectations for global equity markets, analysts are now trimming estimates and are expected to continue doing so. Nonetheless, declining equity prices have driven valuations lower, increasing expected long-term returns. The price-to-forward earnings ratios for the S&P 500, S&P/TSX and MSCI World Indexes declined 20 to 25 per cent in 2018. For the MSCI World Index, this, along with a 48-basis point increase in the dividend yield, has boosted our estimated annual return over the next ten years from 4 to 7 per cent in January 2018 to 8 to 10 per cent at present.

On the trade front, China and the U.S. are talking and delaying any new tariffs. Progress is possible and there may be no new tariffs. Geopolitical risks may persist, but it could have little economic impact as has often been the case historically.


Zachary Curry's Top Picks

Zachary Curry, president and portfolio manager at Davis Rea, reviews his top picks: Brookfield Infrastructure Partners, Goldman Sachs and Walt Disney.

Most recent purchase: Oct. 25 at $50.17.

Brookfield Instructure Partners owns and operates infrastructure assets such as utilities, toll roads, pipelines, network towers and ports globally. They have a great track record when it comes to managing their portfolio and deploying/recycling capital. They routinely acquire interest in infrastructure companies or projects, invest capital to provide operational improvements, and then sell the interest. Their global reach enables them to take advantage of improving growth in both developing and emerging markets. They recently sold 33 per cent of their interest in a Chilean toll road asset for a 17 per cent return on investment (or US$395 million after tax) and acquired data centres in South America and Australia. They have a large backlog, with close to $1 billion being put to work in new projects over the next 24 months.

Brookfield Infrastructure is ramping up some of the investments they’ve made, integrating Enbridge’s Montney midstream assets, the Enercare assets and the data centre assets into the company. They continue to recycle capital, with five other assets currently in sale processes. With infrastructure assets providing steady cash flow even in the face of rising interest rates and inflation (75 per cent of their revenue is indexed to inflation), the company is able to grow organically and support the its 4.6 per cent yield.

Most recent purchase: Nov. 16 at $201.71.

Goldman has been using excess funds to return capital to shareholders through dividend increases and share repurchases. The return of volatility has been helpful for the bank as its fixed income, currencies and commodities (FICC) and its equities divisions reported stronger business last quarter. Goldman has expanded its retail banking presence with the Marcus online banking product and made inroads growing its commercial banking business. The bank will benefit from increased capital markets and M&A activity by corporations, but it has also grown its investment management business to 20 per cent of revenue, which provides more stable, recurring revenue. From a valuation basis, Goldman is also trading at more attractive price-to-book and price-to-earnings multiples versus its investment banking peers.

We view the recent 1MDB scandal as a manageable loss for Goldman, as a potential fine is manageable and the problem appears to be limited to its Southeast Asia office. Goldman is continuing to improve its financial metrics, reporting record return on equity levels while starting to see some of their growth initiatives play out.

Most recent purchase: Oct. 25 at $113.49.

Disney is the world's largest independent media conglomerate in terms of revenue. The company announced in June an agreement to acquire 21st Century Fox for US$71 billion that’s expected to close this summer. While operating income was lower than expected in Q2/18, it was mainly due to tougher comparables in the prior year as well as a weaker studio release schedule.

Disney is also starting its own streaming service to compete with Netflix. Known as Disney+, it’s scheduled to begin service in late 2019, with the company saying it will not renew its contract with Netflix (which expires at the end of 2019). Disney’s other streaming service, ESPN+, now has 2 million paying subscribers: twice the number from five months ago. The same underlying technology will power the Disney+ platform.

The parks and resorts business is maintaining its momentum, doing well in Shanghai, Hong Kong and Paris. Disney is also opening two Star-Wars-themed areas at both of its U.S. parks, which should bode well for business.




PAST PICKS: FEB. 14, 2018

Zachary Curry's Past Picks

Zachary Curry, president and portfolio manager at Davis Rea, reviews his past picks: JPMorgan, Kelt Exploration and Brookfield Infrastructure Partners.


  • Then: $115.03
  • Now: $102.00
  • Return: -11%
  • Total return: -9%


  • Then: $7.18
  • Now: $4.48
  • Return: -38%
  • Total return: -38%


  • Then: $50.82
  • Now: $52.59
  • Return: 3%
  • Total return: 9%

Total return average: -13%




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