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Three investment experts see greater volatility and more modest growth in North American stock markets this year.turk_stock_photographer/iStockPhoto / Getty Images

Investing in the stock market in 2019 was not for the faint of heart given the uncertainties of the United States-China trade war, Britain’s plan to exit the European Union (Brexit) and slowing global growth.

Markets rallied in December as headwinds began receding. The U.S. and China agreed to phase one of a trade deal, which is to be signed this month; Britain passed a bill to make Brexit a reality by Jan. 31; and U.S. and European central banks left interest rates unchanged as growth appears to be on a sounder footing.

Still, U.S. President Donald Trump’s looming Senate impeachment trial and uncertainty from the coming U.S. presidential election in November could effect markets this year. The flare-up of tensions in the Middle East this month may be receding somewhat, but it remains a key risk for market players, especially as stocks continue to press ever higher into record territory.

We asked the chief investment officers (CIOs) at three investment firms for their outlook on the markets this year.

Tyler Mordy, president and CIO at Forstrong Global Asset Management Inc.

Emerging markets and European and Japanese equities offer more compelling opportunities as global growth stabilizes and political risks decrease, says Mr. Mordy, who oversees exchange-traded fund (ETF) portfolios at Forstrong.

“We are definitely minimizing exposure to the U.S. and increasing our exposure to these international regions,” he says, adding that the U.S. stock market trades at a huge premium to its global counterparts.

Emerging markets are attractive partly because “they have a lot more room to lower interest rates [and] to stimulate fiscally. … That remains their ace in the hole,” he says.

Mr. Mordy favours China and other Asian countries such as Taiwan, South Korea and Vietnam. Forstrong holds ETFs such as Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR-A) and iShares MSCI South Korea ETF (EWY-A) in its portfolios to play these markets.

Technology stocks helped the U.S. stock market rise by about 29 per cent last year. In part, that’s because U.S. stocks and bonds were the “safest story” in 2019, he says. “When global growth is subdued and people fear a recession, U.S. stocks tend to do well because growth is scarce, and people will pay up for growth.”

As the U.S. market “melted up, we have been selling into [the rally] and changed the makeup of the sector composition within our U.S equity exposure,” he says. Forstrong’s portfolios now own U.S. banks through Financial Select Sector SPDR ETF (XLF-A) because “they have been shunned for a long time and are cheap.”

When it comes to Europe, Mr. Mordy likes iShares MSCI Europe Financials ETF (EUFN-Q), which holds European bank stocks.

“This ETF is deep in the bargain bin,” he says. “Most European stocks have dividend yields of around 4 per cent, but [that figure is] much higher in the banking sector.”

Greg Taylor, CIO and portfolio manager at Purpose Investments Inc.

The U.S. stock market, which hit a record high in 2019, is going to be more volatile this year in the run-up to the presidential election, Mr. Taylor says.

The market has priced in a victory for Mr. Trump, but if his popularity slips or if the Democrats’ presidential candidate is tough on business – such as pushing to break up big tech companies – those factors could be a risk to growth, he says.

Global growth could pick up this year on the back of improving U.S.-China trade relations and more fiscal stimulus around the world, he adds. “I think that the big story of 2020 is that the rest of the world may outperform the U.S. market.”

Cyclical stocks – such as bank, mining, industrial and energy stocks – offer opportunities, he suggests. “Canada could outperform the U.S. this year as long as we get the rebound in global growth and commodities participate.”

Some energy and cannabis stocks, which have solid fundamentals but were oversold amid aggressive tax-loss selling late last year, could get some upward momentum, he says. “You might see some positive surprises.”

Tourmaline Oil Corp. (TOU-T) and Whitecap Resources Inc. (WCP-T) are attractive energy names, he says. Among Canadian cannabis players, he likes extraction companies such as MediPharm Labs Corp. (LABS-T) and Valens GroWorks Corp. (VLNS-X).

Yet, Mr. Taylor says that more companies in Canada’s cannabis industry are going to “fail or have to consolidate” because there are too many licensed producers and slower-than-expected sales.

Among U.S. cannabis companies, he likes Curaleaf Holdings Inc. (CURA-CN) and Green Thumb Industries Inc. (GTII-CN). U.S. cannabis players will continue to do better and “grow a lot faster as U.S. legalization of marijuana gets closer to happening,” he says.

Progress in approving bills, such as the STATES Act to let U.S. states legalize pot without federal interference, would bring more excitement to the space, Mr. Taylor says.

Dean Orrico, president and CIO at Middlefield Capital Corp.

North American stock markets are expected to post modest gains this year after chalking up robust, double-digit returns in 2019, Mr. Orrico says. “We expect a 7- to 8-per-cent total return in both Canada and the U.S.”

Phase one of the U.S.-China trade deal, Brexit and the U.S.-Mexico-Canada Agreement (USMCA) are positive developments, but markets have already priced them in, he says. “That’s part of the reason why we see more modest returns.”

U.S. stocks will also face higher volatility from impeachment proceedings and the presidential election, he suggests. Uncertainty about other phases of U.S.-China trade deals, Britain’s future relationship with the EU and increased Middle East tensions can also weigh on investor sentiment.

Canada’s stock market looks compelling as the S&P/TSX Composite Index trades at about 15 times forward earnings versus 18 times for the S&P 500 index, he adds.

There are opportunities in industrial real estate investment trusts (REITs), which are good ways to play the growth of the e-commerce sector, Mr. Orrico says. “We like Granite REIT (GRT-UN-T) in Canada and Prologis Inc. (PLD-N) and STAG Industrial Inc. (STAG-N) in the U.S.”

Pipeline stocks such as Enbridge Inc. (ENB-T), Gibson Energy Inc. (GEI-T), Pembina Pipeline Corp. (PPL-T) and TC Energy Corp. (TRP-T) are lower-risk ways to play the energy sector, he says. He also likes industrial stocks such as Morneau Shepell Inc. (MSI-T) and Westshore Terminals Investment Corp. (WTE-T).

Mr. Orrico is also upbeat on U.S. health-care stocks, adding that the recent repeal of a tax on medical devices is providing some support for the sector.

“We like Thermo Fisher Scientific Inc. (TMO-N), Edward Lifesciences Corp. (EW-N) and Becton Dickinson and Co. (BDX-N) in this space. Within pharmaceuticals, we like companies like AstraZeneca PLC (AZN-N) and Bristol-Myers Squibb Co. (BMY-N) as well as UnitedHealth Group Inc. (UHN-N) on the insurance side,” he says.