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Not only are Canadian equities much cheaper than U.S. stocks on a price-to-earnings multiple, but they are also approximately half in book value and about double in dividend yield, says one investment officer.Michael M Santiago/Getty Images/Getty Images

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As the year comes to a close, for most investors it can’t happen soon enough. After several years of strong returns, 2022 was a rare year when most major stock indexes fell at the same time bonds also declined.

Now, it’s time to look ahead to 2023. Globe Advisor spoke with several money managers, and came up with five investment themes to focus on in the coming year.

1. Return to quality

Barry Schwartz, executive vice president and chief investment officer at Baskin Wealth Management in Toronto, notes that heading into 2022, many quality companies in the U.S. were trading at 30 to 40 times earnings.

“But now, with short-term bonds and [guaranteed investment certificates] offering yields of 5 per cent, paying those kinds of multiples for growth doesn’t work,” he says.

Mr. Schwartz notes that with the market downturn, investors now get to buy those companies at 20 to 25 times earnings, a level that hasn’t been seen in many years for quality businesses.

“We think most of the damage from multiple compression on quality stocks is complete as it looks like inflation has peaked around the world. Interest rates will stay high, but the big move is behind us,” he says.

As a result, Mr. Schwartz points to switching from defensive companies that offer no growth to companies that can double their earnings over the next five years such as Apple Inc. AAPL-Q, Inc. AMZN-Q, Visa Inc. V-N, Microsoft Corp. MSFT-Q, and Google LLC’s parent company, Alphabet Inc. GOOG-Q.

“After a decade of being right owning those companies, 2022 delivered a gut punch,” he says. “But there is a reason those companies did so well. Growth always gets rewarded over time – and now you can buy growth on sale.”

2. Canada over the U.S.

According to Kim Shannon, founder and co-chief investment officer at Siona Investment Managers Inc. in Toronto, “Canadian stocks are the cheapest they’ve been versus the U.S. in more than 40 years.”

She notes that not only are Canadian equities much cheaper than U.S. stocks on a price-to-earnings multiple, they’re also approximately half in book value and about double in dividend yield.

“The last time Canada was this cheap was in 2000, and Canada rather consistently outperformed the U.S. and global indexes for the next 11 years,” Ms. Shannon says.

She adds the current defensive pricing of Canadian stocks offers superior expected returns compared with U.S. or global equities. As well, in the five periods since the 1930s when inflation has been at more than 4 per cent, Canada outperforms the U.S. by 8 per cent on average.

3. Will the bear wake from hibernation?

Colin Cieszynski, chief market strategist at SIA Wealth Management Inc. in Toronto, says monetary tightening and reduced liquidity were primarily responsible for driving the 2022 bear market in stocks and bonds. With long-term treasury yields coming back down, that pressure has eased for the moment.

“Looking back at the 2000-02 and 2007-09 bear markets, however, experience has shown that it can take years, not months to unwind the excesses of a bull market completely,” he says.

“Stocks may continue to decline as a recession takes hold and earnings become more of a focus.”

Mr. Cieszynski notes that, for now, the market is bouncing back but large swings could take place in 2023.

He says that environment may continue to favour active, tactical strategies and risk management over the buy-and-hold or balanced strategies of previous years.

4. Playing the energy transition

Rob Lauzon, managing director and chief investment officer at Middlefield Capital Corp. in Toronto, notes ambitious climate targets from governments and corporations have set the stage for more than US$100-trillion in capital investments to achieve net-zero goals.

“We have been exposed to the energy transition for several years, but the setup for 2023 is particularly attractive,” he says.

Mr. Lauzon points to two significant events that took place in 2022 that will have far-reaching impacts.

The first is Russia’s invasion of Ukraine. He notes that prior to the war, Russia provided almost 40 per cent of Europe’s natural gas needs. Now, virtually all Russian-supplied gas is being displaced, which has led to a resurgence of the North American liquefied natural gas (LNG) industry.

The second event Mr. Lauzon highlights is the U.S. Inflation Reduction Act. He notes the US$750-billion package includes major investments for combatting climate change.

As a way for investors to play this theme, Mr. Lauzon’s firm has launched a mutual fund, Middlefield Global Energy Transition Class.

For a specific stock, he likes Calgary-based Tourmaline Oil Corp. TOU-T, highlighting the company’s exposure to the LNG Canada project as well as agreements with U.S. firms operating on the Gulf Coast.

5. Adding back bonds

Brianne Gardner, financial advisor and wealth manager with Velocity Investment Partners at Raymond James Ltd. in Vancouver, says, “The fixed-income market has proven to be a challenging environment for investors for two years now, but a pause and reversal of rising interest rates could turn out to be a golden opportunity for those swift enough to catch bonds on the rebound.”

She notes that her advisory group has actively kept its fixed-income exposure at the lowest level it’s ever been at, but is now rotating back into that asset class.

In Ms. Gardner’s view, the end of the tightening cycle will occur in the coming months, which will set the stage for a favourable environment for bonds.

“We’re confident that inflation will continue to fall, interest rates will eventually come down, and bonds will become increasingly important over the next year,” she says.

Her firm also sees “very compelling” yields in the 6 to 9 per cent-plus range in the fixed-income landscape and has continued adding back quality bond exposure to portfolios selectively.

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