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Even if interest rates rise this year, advisors say it will happen gradually so that it doesn't hinder the economic recovery or take investment capital away from stocks.William_Potter/iStockPhoto / Getty Images

For most investors, 2021 was a stellar year despite some turbulence in December. The majority of the world’s stock market indexes enjoyed double-digit annual percentage increases and reached record highs. However, as the old saying goes, past performance does not predict future results.

Bearing that in mind, we asked some of Canada’s Top Wealth Advisors how they’re positioning clients’ portfolios for this year, and which sectors, themes, and specific stocks they’re looking at to deliver alpha in 2022.

“The recent sell-off in the markets presents an excellent buying opportunity for 2022,” says Jay Smith, portfolio manager and investment advisor at CIBC Wood Gundy in Toronto.

He says the massive U.S. infrastructure bill will help fuel gross domestic product growth and further reduce unemployment.

Mr. Smith also notes that while interest rates will begin to rise in the U.S. and Canada in 2022, it will happen slowly, so the economic recovery will not be choked off.

“Easy money, low interest rates, and moderate inflation are the stuff that bull markets are made of,” Mr. Smith says. “Just like the swoon that followed [the] Delta [variant], the market could make new highs after the swoon created by Omicron dissipates.”

Mr. Smith highlights three sectors he thinks investors should overweight this year.

The first is Canadian banks – particularly Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T and Canadian Imperial Bank of Commerce CM-T.

He points to their recently announced dividend increases and share buybacks that followed the Office of the Superintendent of Financial Institutions’ removal of restrictions. He also says the reversal of loan-loss provisions taken during the pandemic will boost the banks’ earnings.

Technology is Mr. Smith’s second favoured sector. One of his preferred names is Nvidia Corp. NVDA-Q. He says the company’s graphics processing units are used in most high-end computers, particularly for gaming. Nvidia’s hardware is also key for crypto-mining and artificial intelligence applications, as well as the metaverse.

Two other tech stocks he likes are Qualcomm Inc. QCOM-Q and Apple Inc. AAPL-Q. Mr. Smith says Apple “just keeps innovating and putting out incredible products at high enough prices to keep their margins pristine. Apple was making new highs while the market was hitting new lows. It’s core to my portfolios, no pun intended.”

The third sector Mr. Smith highlights is pharmaceuticals. He notes Moderna Inc. MRNA-Q trades at 10 times earnings and went from US$14-million in revenue to US$16-billion in guaranteed government revenue in one year.

“That’s what I call growth,” he says. “Some characterize it as a one-trick pony, but it has a pipeline of drugs that it’s working on, including a flu shot that is 95 per cent effective, and drugs for HIV and oncology.”

Similarly, he likes the outlook for Pfizer Inc. PFE-N.

‘Challenging year’ for major indexes

Money has to go somewhere, says David LePoidevin, director, wealth management, senior vice president and portfolio manager with the LePoidevin Group at Canaccord Genuity Wealth Management in Vancouver.

“When we look at the outlook for 2022, the question is where is the money going to go?” he says. “Cash has been paying zero in a period of 5 per cent inflation. Ten-year bonds pay just 1.4 per cent. So, with a deflation scenario, both of these look very unattractive.”

While the Bank of Canada has signalled interest rate hikes, he believes it will not likely raise rates to the point at which investment capital flows away from stocks. Altogether, he expects overall investor returns in the mid-single digits, including dividends.

Although Mr. LePoidevin says the major indexes could have a challenging year, “well-selected value stocks should trounce the returns of cash or bonds.”

One stock he highlights is Manulife Financial Corp. MFC-T, noting its dividend yield of 5.5 per cent. He says its shares could rise to $30 each from about $24 at year-end if interest rates nudge higher and life insurers benefit from higher interest rates when they hedge their insurance contracts.

Mr. LePoidevin also favours gold producers, saying that several are trading at lows, and even with gold GCZ21 at current prices, they’re generating “huge” cash flows.

For fixed income, Mr. LePoidevin favours fixed and floating preferred shares.

He says many issues are trading at discounts to par value and as the payouts on many will reset higher as interest rates increase.

Specifically, Mr. LePoidevin points to BCE Inc. BCE-T, which has three issues up for reset in 2022 that trade at a 20 per cent discount to par value.

Could 2022 be ‘stock picker’s market’?

Guy Côté, senior vice-president and portfolio manager at National Bank Financial Wealth Management in Montreal, expects some of the investing trends of 2021 to continue this year, with investors placing an even greater emphasis on profitability and predictable growth.

He says market participants will be looking for names with a clear ability to pass on inflationary pressures while growing their business at a healthy and sustainable rate.

Mr. Côté expects 2022 to be a stock-picker’s market, in which opportunities will arise from increased volatility, shifting sector leadership, and a focus on company-specific attributes such as recurring revenue, market leadership, pricing power, and an impeccable balance sheet.

He is focusing specifically on opportunities related to the increased adoption of technology and the further electrification of society. He adds that advancements in technology have enabled companies to reduce the cost of goods sold while increasing their final output.

The Companies Mr. Côté sees gaining from this structural change include Microsoft Corp. MSFT-Q and ASML Holding NV ASML-Q, as well as Canadian firms Kinaxis Inc. KXS-T and Nuvei Corp. NVEI-T.

Mr. Côté says electrification will play a major role in helping society address climate change.

Governments and multinationals alike have committed tremendous resources to these goals and multiple companies stand as beneficiaries – particularly power management companies, electric infrastructure providers, and renewable energy producers, he says.

Mr. Côté also sees “colossal opportunities” in infrastructure and natural resources.

WSP Global Inc. WSP-T and First Quantum Minerals Ltd. FM-T are two names that stand to benefit, he says.

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