Full episode: Market Call for Wednesday, February 5, 2020
Zachary Curry, president and portfolio manager at Davis Rea
Focus: North American large caps
The global economy is poised to improve this year, with Canada and the U.S. following it. Indeed, global manufacturing activity began to recover in the second half of 2019, helped by lower global and especially U.S. interest rates.
Equities are expected to outperform bonds, with the economically-sensitive areas of the stock market such as industrials and technology leading the way. Rising government bond yields will be a headwind for fixed income returns, with short-term corporate bonds likely to be the best performers in that asset class. Higher bond yields will present a challenge to high-yielding, slow-growth sectors like utilities. Banks also tend to do well, with the outlook for U.S. banks looking particularly good.
There’s been progress on China-U.S. trade negotiations, but America is now turning its guns on the European Union. A repeat of the China trade battle would be problematic for economies and asset prices.
As long as the coronavirus evolves along the lines we saw for SARS and MERS, it will be a temporary blip for the global economy and asset prices. As the source of the virus, China faces the biggest risks of economic disruption, which argues for caution on commodity and emerging market equities.
BROOKFIELD INFRASTRUCTURE PARTNERS (BIP-U TSX)
Brookfield Infrastructure owns and operates assets such as utilities, toll roads, pipelines, network towers, data centers and ports globally. They focus on high-quality, long-life assets that generate stable cash flows and require minimal maintenance capital expenditures. 95 per cent of the company’s cash flows are regulated and contracted, with 70 per cent of their funds from operations (FFO) being recession-agnostic. It’s one of the most stable and recession-resistant companies in our portfolios, paving the way for uninterrupted dividend growth and opportunistic investments.
The company’s role is to drive efficiencies with the intent of selling the improved asset at higher valuations and re-deploying capital back into new projects. This method of capital recycling reduces its reliance on capital markets to fund growth operations and minimizes shareholder dilution. Looking ahead, we expect the company to raise over $1 billion through mature asset sales in 2020, which will help fund new growth initiatives and continued shareholder returns.
JPMORGAN (JPM NYSE)
With approximately $2.7 trillion in assets, JPMorgan is one of the five largest banking institutions globally. It’s one of the best diversified banking franchises and a global leader across all operating segments. A solid fiscal 2019 saw earnings per share grow 19 per cent to $10.72.
JPMorgan’s “fortress” balance sheet touts a 12.4 per cent Common Equity Tier 1 (CET1) ratio, well in excess of the regulatory requirement. This excess capital is a source of stability in the face of economic uncertainty and allows JPMorgan to continue investing in growth opportunities while returning capital to shareholders. In 2019, JPMorgan returned approximately $34 billion to shareholders through dividends and repurchases. We expect a similar cadence moving forward, potentially taking the form of a special dividend.
VISA (V NYSE)
Visa operates the world’s largest retail electronic payments network. We believe that the global shift towards electronic payments and e-commerce will continue to take a greater proportional share of total consumer and business spending, providing a long-term secular tailwind for the stock. Double-digit organic revenue growth with 60 per cent operating margins sets the stage for sustainable earnings growth and free cash flow generation.
On Jan. 13, Visa acquired Plaid, a fintech company operating a data infrastructure network allowing digital finance startups to connect with consumers and their financial institutions. Plaid enables developers to build products that interact with their user’s banks and credit cards, giving them access to a centralized source of account and transaction data to create a more seamless in-app experience. The transaction will expand Visa’s addressable market in North America by approximately $3 billion through the establishment of new relationships in the fintech space, while Visa’s network will enable Plaid to accelerate their international growth plans. The combined entity will shift Visa into a more diversified payments company. The acquisition is expected to be immediately accretive to revenue growth upon closing in mid-2020.
PAST PICKS: FEBRUARY 12, 2019
BROOKFIELD INFRASTRUCTURE PARTNERS (BIP-U TSX)
- Then: $53.28
- Now: $71.87
- Return: 35%
- Total return: 41%
GOLDMAN SACHS (GS NYSE)
- Then: $194.49
- Now: $244.31
- Return: 26%
- Total return: 28%
WALT DISNEY (DIS NYSE)
- Then: $109.20
- Now: $141.76
- Return: 30%
- Total return: 31%
Total return average: 33%