Skip to main content
bnn market call

Peter Brieger.

Peter Brieger is chairman and managing director of GlobeInvest Capital Management. His focus is North American large caps.

Top Picks:

Agrium (AGU.TO)

The downward pressure on fertilizers – particularly potash – continues as contract price and volume negotiations in China and India drag on. In Agrium's case, this has been reflected in an approximately 26-per-cent share price decline from early '15. While the world is currently awash in supplies, we think this is a short-term phenomenon. Droughts such as that in Brazil, an unexpectedly high number of acres being planted in the U.S. and long-term chronic under-application in China and India speak to a long-term favourable demand. In Agrium's case, its retail business has been a jewel in its crown. While we may see some further short-term price weakness, we think the negatives have been discounted.

Manulife (MFC.TO)

Worries about Manulife range from further write-offs from its oil exposure and continuing low interest rates to uncertain stock markets. In Q1, it wrote off $340-million of its energy investments, compared to $77-million in Q1 2015. Its current exposure to energy is $12.7-billion, of which 95 per cent is still investment-grade. Most of the damage was from its exposure to alternative assets. Offsetting these worries is the current state of its basic businesses. For example, core earnings from its Asian business rose 33 per cent year-over-year, Canadian earnings rose 30 per cent, and the U.S. lagged behind at 4 per cent. We think the market has discounted some part of the negatives while not reflecting the positives. For example, its current PER on 2016 EPS estimates is 9.9, compared to a ten-year average of 12.4 and a five-year average of 11.8.

Canadian National Railway (CNR.TO)

Q1 2016 was a major challenge for all North American Class 1 railways. Volume trends were weaker than expected, reflected in a 10.3 per cent decline in RTM and a 5.8 per cent decline in carloads. A speedy reaction resulted in a decline of "dwell" times and labour costs as well as an improvement in velocity, employee efficiency and customer pricing. Operating ratios declined 3.1 per cent. In recognition of the headwinds, CN's management reduced guidance to a flat 2016 compared to 2015. Looking out to 2017 and 2018, consensus EPS estimates are for increases of 10.0 per cent and 8.9 per cent. In recognition of the current environment, the stock price has pulled back about 8.2 per cent from a recent high of about $83.50. Given our favourable view about economic growth continuing in Q2 2016 and for the next several years, we think the stock is good value.

Past Picks: April 27, 2015

Toronto-Dominion Bank (TD.TO)

Then: $56.17 Now: $55.35 -1.46% Total return: +2.47%

Apple (AAPL.O)

Then: $132.65 Now: $92.79 -30.05% Total return: -28.37%

Agrium (AGU.TO)

Then: $125.64 Now: $109.61 -12.76% Total return: -9.41%

Total Return Average: -11.77%

Market outlook:

Short-term (three months): Since their January and February swoons, Canadian and U.S. markets have recovered. For example, as of last Friday's closes, the S&P/TSX Composite had recovered to levels above its 2015 close, while the S&P 500 reached its year-end level and has been in a trading range since. From a purely technical view, neither market's index looks ready to break down. The TSX Relative Strength Index ("RSI") stands at 52.43 relative to an over-bought ("OB") reading of 70.0, while the S&P 500 RSI stands at 47.27, relative to an OB reading of 60.

In the U.S., the Investor Intelligence Bull Bear Ratio stands at just under 2.0, the mid-point between an over-valuation reading of 3.0 and an under-valuation of under 1.0. Looking ahead, the 2017 estimated price-earnings ratios are 14.9 for the TSX and a consensus 15.1 for the S&P 500. This compares to the long-term averages of 17.1 and 13.9, respectively. As of last Friday, the TSX stock yields of about 3.0 per cent exceeded nominal Canadian Federal government bond yields for all maturities, while in the U.S., the S&P 500 yield of 2.21 per cent exceeded U.S. Treasury yields for maturities from 2 to 10 years. Given the decline in nominal yields in Q1 for most government bond maturities and recent "Fed speak," it is hard to see bonds (higher rates) challenging equities in the immediate future.

In currency markets, all eyes are on the U.S. dollar. As measured by the DX/Y, as of last Friday it had declined 4.9 per cent from year-end and 6.6 per cent from its late 2015 high. Where it goes from here in is no small part a function of U.S. interest rates, which will be a function of U.S. CPI going forward. Excluding energy, the latest U.S. CPI reading was 2.0 per cent, compared to the overall reported CPI of 0.9 per cent. If the energy component stops going down as it did last month, it implies a potential annual CPI of close to 3.0 per cent.

However, the oil price outlook has been thrown into disarray by the weekend dismissal of the Saudi oil minister Ali al-Naimi. So in the short-term, I see little upward pressure on rates and therefore, the U.S. dollar.

Other short-term uncertainties that markets have to deal with are the potential for yet another Greek financial problem, a possible Brexit and, looking out beyond three months, the outcome of the U.S. election and subsequent government policy. As discussed below, all is not doom and gloom, and regardless of current uncertainties and potential seasonal influences, I see markets continuing in a trading range.

Long-term: I will repeat two things mentioned in the past. Given the severity of the Great Recession, it will take longer than expected to achieve a full recovery. Reported economic data will likely continue to be volatile. Given current uncertainties, Wall Street may over-react to what it perceives to be one or more potential negative trends.

However, on Main Street, attitudes are better and expectations are considerably higher as measured by the Michigan confidence indicators, not to mention others. I look at four things: the number of consumers working, the hours they work, average year-over-year hourly earnings' (+ 2.2 per cent) and the increase in the market value of their homes. All are favourable and auger well for the U.S. automobile and housing industries, two key drivers of the U.S. economy. On the industrial side, a positive indicator is the U.S. ISM Purchasing Managers' Production index, at 54.2 per cent.

That said, there are some headwinds which some are extrapolating into potential future negative trends. For example, the U.S. Industrial Production Index is down 2.0 per cent year-over-year and has been in a declining trend since mid-2014. However, drilling down, one sees that the manufacturing index (73.9 per cent of the IP index) rose 0.4 per cent year-over-year, which was not enough to offset the 7.7 per cent decline in utilities (10.9 per cent of the index) and the 52 per cent decline in mining (15.5 per cent of the index). Also, the volatile U.S. Durable Goods have declined 0.3 per cent year-over-year. Finally, U.S. corporate capex has lagged for two reasons: 1) the past impact of the rise in the U.S. dollar; and 2) the focus on M&A, as in many cases it is easier/cheaper to acquire than to build.

In summary, I see a trading range for markets until the fall, at which time I expect to see further improvement in the economy and stock markets even though the former is likely to continue to be lumpy.

Interact with The Globe