Zachary Curry, president and portfolio manager at Davis Rea
Focus: North American large-cap stocks

MARKET OUTLOOK

Since spring, the world' economies have been reopening and activity has rebounded strongly. However, we’re now transitioning to the recuperation phase, where the sectors most sensitive to the virus will only reopen gradually and the impact of business and household insolvencies will be felt. As a result, economic growth will be slower and more dependent on the path COVID takes. With second waves under way in many nations and third waves being a possibility, growth will be more uneven.

The economic rebound has boosted commodity prices and corporate earnings, but both will follow more uneven recovery paths in the recuperation phase. The Canadian dollar is likely to follow commodity prices higher since Canadian and U.S. short-term interest rates are likely to remain locked at current levels.

Equity markets have recovered strongly since late March, with tech-heavy indexes like the S&P 500 hitting new highs and other indexes getting close. As the world’s economies transition to recuperation, the upward trajectory in equity prices is likely to slow. More volatility is very probable, especially with the U.S. election poised to be hard-fought and contentious and Brexit heading for a crescendo. Low interest rates should support valuations and, with earnings recovering, equity prices are expected to trend higher. Economically sensitive sectors are expected to outperform, especially the more growth-oriented names with strong balance sheets.

Policymakers have done much to support their economies during this ordeal. This is likely to continue. Central bankers have reduced short-term interest rates to near zero and, with inflation likely to remain low, they are likely to keep them low through 2022 or possibly longer. They’re also likely to continue buying bonds to keep yields as low as possible.

TOP PICKS

Brookfield Infrastructure Partners (BIP-U TSX) is one of the largest global owners and operators of critical infrastructure networks around the world.

BIP and BIPC have a current dividend yield of 4.1 and 3.53 per cent respectively and the company aims to grow the distribution by 5 to 9 per cent each year. Brookfield Infrastructure’s operations are largely recession-agnostic as over 75 per cent of cashflows are underpinned by inflation-linked take-or-pay contracts with an average maturity of 11 years. With $4.3 billion in available liquidity, the company has the ability to capitalize on opportunities at a critical juncture where governments and businesses around the world may start looking to offload assets in order to pay down elevated debt levels born out of the pandemic.

FedEx (FDX NYSE) provides transportation, e-commerce, and business services in over 220 countries worldwide.

Through the pandemic, FedEx has experienced significant growth in demand for their services, largely fueled by a shift of spending away from service-based sectors towards goods with meaningful acceleration in e-commerce adoption as brick-and-mortar stores shut down. E -commerce as a percent of total U.S. sales grew to an estimated 21 per cent compared to 15 per cent the year prior. FedEx now expects 96 per cent of their U.S. growth to come from e-commerce and expect the U.S. domestic e-commerce market to reach 100 million packages per day by 2023. As the peak season leading into the New Year approaches, FedEx is implementing surcharges to manage what they expect to be record levels of demand.

Microsoft (MSFT NASD) is the world’s largest software developer and is a leading provider of computer operating systems and productivity tools for both personal and enterprise customers.

Microsoft’s Azure cloud computing business is the second largest behind Amazon’s AWS and has the most comprehensive offering of productivity tools in the industry through its Office 365 platform. With these tools, companies can effectively run their businesses from anywhere in the world, a core function in any business continuity plan that significantly reduces the risk of disruption stemming from an inability to access the physical office space. The global pandemic has accelerated demand growth for products that enable remote work and Microsoft is benefiting from the trend by onboarding new customers and upselling existing clients. The utility-like recurring cash flows from the company’s growing subscription-based revenue streams and their diversity of product offerings lead us to believe that they will continue to generate attractive shareholder returns while investing in future growth.

PAST PICKS: JUNE 5, 2019

JPMorgan Chase (JPM NYSE)

• Then: $110.13
• Now: $96.61
• Return: -12%
• Total Return: -8%

Brookfield Infrastructure Partners (BIP-U TSX) 

• Then: $55.89
• Now: $63.49
• Return: +25%
• Total Return: +32%

Stryker (SYK NYSE)

• Then: $189.14
• Now: $209.88
• Return: +11%
• Total Return: +13%

Total Return Average: +12%

Twitter: @DavisReaLtd
Website: www.davisrea.com
Blog: www.davisrea.blog