John Kim is portfolio manager at Aston Hill Financial. His focus is North American equities.
Royal Bank (RY.TO)
Banks in general sold off on fears related to energy exposure, possible large loan losses and housing (the Canadian housing market is in a bubble and could burst). And there’s the concern that the Canadian economy is heading into recession due to fears about energy and housing.
Royal Bank is in much better shape than in 2008/2009, and its energy exposure is very manageable at 2 per cent. Foreign investors still do not understand the Canadian mortgage market. It is different from the U.S. You cannot walk away from your mortgage in Canada, hence why people are very diligent when it comes to paying it off. In 2016, RY will benefit from its acquisition of City National. Capital markets had a terrible start to the year, but this is already widely known. RY’s valuation is relatively low, with a great dividend yield that is super safe.
Bank of America (BAC.N)
There is a sell-off in banks due to the belief that there will be no more rate hikes, energy losses are increasing, and a general belief that the U.S. economy is sliding into recession. BAC is in much better shape than in 2008/2009. Its exposure to energy is less than 3 per cent. It is the most levered to the U.S. economy of the money-centre banks, and I don’t believe the U.S. will enter a recession. BAC’s valuation is very attractive, trading at less than tangible book value and less than 10s 2016 earnings estimates. It has very good risk/reward.
Ametek is an industrial company focused on electronic instruments (equipment to monitor, test and calibrate instruments) and electromechanical devices (electrical connectors, technical motors and systems, electric motors). It services a wide variety of markets, including aerospace and defence, medical, semiconductors, etc. It has grown both organically and through acquisitions. It has a long track record of growth, 16% EPS CAGR from 2005 to 2015. Its goal is to double earnings every 5 years. It has a conservative management team, a great balance sheet, an attractive valuation at 12X EV/EBITDA and a 4 per cent free cash flow yield. If the U.S. economy (and global economy) gets better, there’s very good upside here.
I expect the U.S. economy to slow but not slide into a recession. I expect under 2-per-cent GDP growth. Housing growth is slowing, and auto sales are merely stable instead of growing. Canada should be flat, with moderate upside if oil stabilizes. Housing is okay. It will not collapse. We could see stimulus in the upcoming federal budget. Chinese manufacturing will stabilize in 2016, but consumer figures will grow. Europe should continue to recover with help from the ECB. Wild cards are the refugee crisis and the U.K.’s possible exit from the EU.
For markets, I expect the S&P 500 to be around 2,000 at year end, down about 2 per cent from 2015. The TSX could finish higher, around 14,000 – a 7 per cent increase from 2015.Report Typo/Error
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