Peter Brieger.
Peter Brieger is chairman and managing director, GlobeInvest Capital Management. His focus is North American large caps.
Top Picks:
It will likely take another several years for the U.S. and other economies to fully recover. As the economies' recovery accelerates, I expect it will precipitate a further rise in stock markets. Therefore, while our three top picks may have short-term issues, I fully expect their shares to reflect a pickup from their current malaise as we move through 2016 towards 2017. In the meantime, investors are being well paid for waiting, as two of the three have yields in excess of 4.0 per cent and one at about 3.9 per cent.
Manulife (MFC.TO)
Date and price of last purchase: January 21, 2016 at $17.75.
In the short-term, MFC has been badly hit by declines in interest rates, equity and energy prices. However, its basis businesses growth rates in Canada and the Far East continue at double digits. Its U.S. business is undergoing short-term problems that management is addressing. Based on the weakness in interest rates etc., management's objective of a $4-billion earnings in 2016 is not likely to be met. However, during the next several years I expect rates to rise and energy and equity market prices to recover. At consensus price-earnings ratios of 9.4 and 8.3 times 2016 and 2017 earnings, I think MFC's share price has well discounted these short-term issues.
Agrium (AGU.TO)
Date and price of last purchase: January 7, 2016 at $119.64
In the short-term, AGU and other fertilizer producers have been hurt by weakness in potash and phosphate prices (and to a lesser extent nitrogen) based on inventory levels, the timing of government purchases (mainly China and India) and currency fluctuations. AGU's saving grace has been its retail operations, which add diversity to its overall operations. In the longer term, emerging/developing nations populations are demanding a higher quality and quantity of food. This augers well for AGU's price/earnings ratio and share price, both of which I think are far too low relative to the TSX.
TD Bank (TD.TO)
Date and price of last purchase: December 21, 2015 at $54.45
The share prices of banks around the world have suffered because of fears of slowing economies and the resulting impact on their income and potential credit losses. This is particularly true for Canada where the collapse in oil prices has magnified the fears of corporate and consumer losses. Certainly, the recently reported Alberta Treasury Branch losses from energy paint a grim picture for Canadian banks going forward. In TD's case, it appears that its exposure to the energy industry is estimated to be 2.0 per cent (as of 12/31/15), the lowest of all the Big Six. While there is no question that loan losses will be higher than expected, during the next several years I think the price of oil will rebound. In TD's case, its exposure to the US economy, about which I am very positive, will lead to an acceleration of earnings. Again, I think its price/earnings ratio and share price have fully discounted these short-term factors.
Past Picks: February 23, 2015
iShares S&P/TSX Global Gold Index ETF (XGD.TO)
Then: $11.05 Now: $11.13 +0.72% Total return: +1.22%
Pembina Pipeline (PPL.TO)
Then: $39.32 Now: $33.46 -14.20% Total return: -10.82%
TD Bank (TD.TO)
Then: $53.54 Now: $52.23 -2.45% Total return: +1.39%
Total Return Average: -2.74%
Market outlook:
The volatility of stock markets continues, caused mainly by fears about a host of potential negative factors, the latest of which is the Lord Mayor of London's announced support for a Brexit. If that were to occur, it could potentially cause markets to decline further. That said, the U.S. market — as exemplified by the S&P 500 — continues in a trading range, the lower level of which is about 1,860, which at this point appears to be holding. We remain positive on the TSX and the U.S. market indices, as there is clearly a disconnect between much of the recently-reported positive U.S. economic data and markets, which are concerned with potential negative outcomes that, in my view, have a low probability of occurring.
Commentary
In making my overall strategic comments and today's top picks, readers should be aware that they are being made in the context of a positive three-year outlook. Given the severity of the Great Recession and the dislocations it produced, it will take at last that long for the current recovery, choppy as it may be, to reach its full potential.
That said, what are some of the most talked about negatives?
• Terrorism: Unfortunately, it is a fact of life, and we will see further acts in North America. As a client living part time in Israel recently commented, "One gets used to it."
• A repeat of 2008-2009: The fear is there, especially among the over-'50s crowd. Market volatility does not help assuage these fears, although with the passage of time, it may eventually be reduced.
• Reverse wealth effect: While rising markets created a positive feeling of "wealth" and to some extent helped consumer spending — at least for those who owned stocks — it creates a reverse effect when markets decline. However, for households that don't own stocks, their reality is the change in the value of their home, jobs availability, hours worked and wage levels, all of which have been improving.
• A slowdown in U.S. industrial production: This has occurred, but most of it can be attributed to a slowdown in U.S. utilities because of warm weather and a sharp cutback in capex by energy firms.
• A banking crisis in China and/or Europe: There is no doubt that questionable loans are rife in the Chinese system. However, a collapse may have marginal repercussions globally, as the impact should be mainly internal. As for Europe, many of its banks are very over-leveraged compared to those in the U.S. European regulators are working hard to shore up the overall system.
• A rising U.S. dollar and its negative impact on U.S. exports and corporate capex: There can be no doubt that the rise of the U.S. dollar index, as represented by the DX/Y, from about 79.0 in 2014 to 101.0 in 2015 has caused great damage. However, since about the fall of 2015, the index declined to about 95 and has since bounced to about 97.37 (as of the morning of 02/16). It is currently below its 50-day moving average of 97.75 and just above its 200 DMA of 97.19.
• World debt levels: Based on studies by Carmen Reinhart and Kenneth Rogoff, current debt levels have been and will likely be one of the inhibitors to future growth. The U.S. consumer is doing a good job of deleveraging, but governments and corporations must do more to aid future growth. The probability of a quick government de-leveraging is low.
On the other side of the ledger there are some major long-term positives. They are:
• Energy costs: In 1973–74, the world experienced a major shift from an era of "cheap" energy to an era of very costly energy. The transition to this new era was painful for many. The recent decline in oil prices raises the question of whether the world is going back to that earlier era. In my view, it is and the savings will be a very positive catalyst for future world growth, even though some U.S. consumers may save more as they continue their de-leveraging.
• Emergence from debt purgatory: Many U.S. citizens who went through a terrible seven-year period resulting from defaults, personal bankruptcies etc. are now out of debt and once again can contribute to the growth in consumer spending.
• U.S. housing and auto industries: In spite of recent improvements, housing still has considerable potential ahead of it. The auto industry, while recently experiencing high output levels, should continue to grow, as the average age of U.S. vehicles is 11.2 years. If that average approached a more reasonsable level of 7 to 8 years, auto production should remain strong.
• Growth in new technologies: According to various experts, we are in a new world in which many new technologies have been created and some will have a major long-term positive impact on world economic growth.