Andrew Pink, portfolio manager at LDIC

FOCUS: Canadian large caps, preferred shares and fixed-income

MARKET OUTLOOK:

What transpired in 2023? Market breadth was thin. Much of the broad market performance was driven by a small number of stocks and essentially one sector. For the TSX, the information technology sector gained nearly 70 per cent, and the next best was health-care, up 16 per cent. Interest rate-sensitive stocks struggled, communication services were down four per cent and utilities were flat on a total return basis.

In 2023, inflation moderated, but it took time. Year-over-year Canadian CPI peaked at 8.1 per cent in June 2022, and was running at 3.1 per cent as of November. GDP continued to rise, although it was widely expected to decline. Unemployment has stayed low. The supply chain issues that materialized through the pandemic finally improved, which helped control inflation and fuelled corporate productivity, and ultimately economic growth.

Interest rates were largely on hold in 2023, rising only 75 basis points from 4.25 per cent to five per cent, compared to the more dramatic 400-basis-point rise from 0.25 per cent to 4.25 per cent in 2022.

What might happen in 2024? Central banks are widely expected to end quantitative tightening. The bond market has priced in a total of five interest rate cuts of 0.25 per cent each from the Bank of Canada through the year. Interest rate-sensitive equities have started to price in the benefit of lower rates and we expect this will continue at a gradual pace until there is more clarity on the scale and timeline of easing.

There are three viable scenarios for 2024:

1. Central bank activity stifles growth, which forces the economy into a recession.
2. A well-timed transition on interest rates engineers a soft landing, avoiding a recession.
3. The economy remains robust, inflation and interest rates stay higher for longer.

Although we believe a soft landing is attainable, at this stage the probability related to each outcome is reasonably close, and we believe diversified and defensive portfolios are the best way to position for the uncertainty.

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TOP PICKS:

Storage Vault (SVI TSX)

Storage Vault is a unique, real estate operating company with a portfolio of storage facilities in strategic locations across Canada. Storage is a needs-based product for individuals, families, and businesses. SVI is a consolidator in a fragmented industry and provides investors with the prospect for reliable long-term growth. Seasonal rental turnover provides management with ongoing market price discovery which helps support a targeted four per cent to six per cent same property net operating income annual growth rate.

Waste Connections (WCN TSX)

Waste Connections provides refuse collection and disposal services for commercial and residential customers in North America. This essential services industry leader has demonstrated an ability to perform in both strong and weak economic conditions. The company offers predictable and reliable free cash flow generation, has consistently delivered on its long-term accretive acquisition strategy, and its diversified client base limits the potential for disruption from customer attrition. The company faced some challenges in Q3, assuming unexpected costs to remediate a landfill site in California. The costs were manageable and some related market volatility presented a rare buying opportunity. 

WSP Global (WSP TSX)

WSP is a global provider of engineering services. The company has scaled expertise in a wide range of industry segments, offering strategic consulting services to its enterprise and government client base primarily residing in OECD countries. The company boasts an impressive long-term track record of organic growth and routinely recycles capital into accretive M&A opportunities to drive additional shareholder value. This is an asset-light business, with a consistently strong contract backlog currently amounting to nearly one year of annual revenue, and a healthy balance sheet with less than two times debt to EBITDA. Global infrastructure development is essential, and complexities partly fueled by ESG initiatives present a significant growth opportunity for WSP Global. 

PAST PICKS: October 14, 2022

Exchange Income (EIF TSX)

• Then: $51.81
• Now: $46.08
• Return: -11 per cent
• Total Return: -9 per cent

Nexus Industrial REIT (NXR.UN TSX)

• Then: $8.39
• Now: $8.36
• Return: .4 per cent
• Total Return: 4 per cent

TD Bank (TD TSX)

• Then: $81.42
• Now: $86.14
• Return: 6 per cent
• Total Return: 8 per cent

Total Return Average: 1 per cent