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Jaime Carrasco is director and associate portfolio manager at Bank of Nova Scotia. His focus is resource and utilities stocks and REITs.

Top Picks:

Dream Office REIT (D.UN TSX)

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Central Fund of Canada (CEF.A TSX)

RESASS Services (RSS CSE)

Disclosure:

Personal

Family

Portfolio/Fund

D.UN

N

N

Y

CEF.A

N

N

Y

RSS

Y

Y

Y

Past Picks: January 24, 2014

Silver Standard Resources (SSO TSX)

Then: $8.96; Now: $7.97 -11.04%; Total return: -11.04%

Algonquin Power & Utilities (AQN TSX)

Then: $7.13; Now: $10.16 +42.50%; Total return: +48.74%

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Whitecap Resources (WCP TSX)

Then: $11.96; Now: $11.42 -4.51%; Total return: +0.55%

Total Return Average: +12.75%

Disclosure:

Personal

Family

Portfolio/Fund

SSO

Y

Y

Y

AQN

N

N

Y

WCP

N

N

Y

Market outlook:

For 2015, I will be keeping an eye on two forces that might affect the market in the next few months: the impact of a rising U.S. dollar upon the emerging market's U.S.-dollar denominated corporate debt, and the consequences of lower oil prices upon the marginal energy producers. In my opinion, both of these factors will have important market impacts.

The ongoing QE programs by various central banks to deal with a slowing global economy are creating greater currency volatility, leading to a rise in the U.S. dollar. The impact of a rising U.S. dollar have the biggest impact upon the U.S.-dollar denominated corporate debt of the emerging markets companies, who now face greater costs of repayment as these debts come due. On the energy side, while low oil prices are good for consumers, they have negative implications for the marginal producers. The U.S. is at risk due to the debt levels of the drilling and fracking industries, which require much higher oil prices to generate the income to retire these debts. In a recent piece I posted on LinkedIn analyzing these two issue, James Rickards described the problem without sugar-coating it: 'The result is a $14-trillion pile of corporate debt that cannot possibly be repaid or rolled over under current economic conditions'. In my opinion the true cost of this problem will come knocking later in the year as these debt starts to come due.

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On a positive side, the effects of lower oil prices upon U.S. energy producers is very good for Canada's oil producers and pipelines. The U.S. will continue to need to mix their Gulf Coast sweet production with heavier crude, to meet their refineries' specifications. With the absence of the U.S. fracking industry, Canada offers the closest source of heavier crude, and the pipelines are the most efficient way to get it there. However for 2015, the industry will have to endure lower oil prices, short term pain for long term gain.

It's important to note that on the currency front in 2014 gold was the world's second best performing currency behind the U.S. dollar, and that since December, 2014, gold and the U.S. dollar have been appreciating in tandem. While rare, this positive correlation also occurred in 1978 to 1980 as gold had its ascent from $200 in October, 1978 to $800 by January, 1980. In my opinion, this makes sense as I see gold as the true currency, and in the current global race to devalue their fiat currencies gold can only appreciate. What we are witnessing is that finally gold is taking on the last remaining competitor, the U.S. dollar. I am hopeful that in 2015 gold finally breaks above $1,350, signalling the end of a long correction that started in the fall of 2011.

In our portfolios, we have lowered the allocation to the oil and gas sector waiting to re-enter later in the year, and have raised cash levels to deal with any possible volatility. The allocation into REITs, pipelines, and utilities is still at the same levels and have added a new sector allocation into global health care.

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