Brett Girard, chief financial officer and portfolio manager at Liberty International Investment Management

FOCUS: Global stocks 

MARKET OUTLOOK:

This year, and in particular this quarter, the one constant has been volatility. Until a clearer picture emerges on the paths forward for interest rates, global conflict or even corporate earnings, this trend is likely to persist. In response, investors should zoom out and articulate what they are solving for, be it liquidity, alpha, beta or even bragging rights.

Looking across asset classes:

Bonds: While “higher for longer” does not erase the last two years of carnage, opportunities are available. Investment-grade corporate bonds with yields over six per cent and durations of four to seven years can make sense in a balanced portfolio. If interest rate cuts come ahead of expectations, there could also be capital gains in addition to the yield.

Equities: Earnings for the third quarter of 2023 have shown muted organic growth and diminished success in passing through inflationary price increases. As higher interest rates continue to inflict damage, watch for a re-enforcing feedback loop of stalled revenue growth, cost-cutting layoffs and a reluctant consumer.

Alternatives: Caveat emptor. Rather than the market pricing these securities daily, the investors supply pricing quarterly or annually. Private asset prices have remained high while publicly traded comparables have been trounced. One of these pricing sources is more correct than the other. 

Cash: Temper the urge to pile into guaranteed investment certificates (GICs). Cash will be locked up through the, term eliminating the opportunity to access other market opportunities. Also, reinvestment risk at maturity could be an issue with interest rate cuts projected next year.

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TOP PICKS:

Fairfax (FFH TSX)

Fairfax continues to enjoy two strong tailwinds: strong sales growth and profitability in the insurance division and increased interest income thanks to short duration fixed income investment portfolio. With Price-to-book still <1x while most competitors are 1.5x, there is room for valuation to catch up to the peer set. 

TC Energy (TRP TSX)

Soon to be a North American Gas pipeline operator with a Nuclear power arm (owing 48 per cent of Bruce Power). Effectively absorbing higher interest rates effectively with 89 per cent of debt fixed-rate, an average term of 18 years to maturity and a weighted average coupon of five per cent. 7.6 per cent current dividend yield and has a history of 23 consecutive years of dividend increases.

Danaher (DHR NYSE)

In the short-term feeling the impacts of the decline in COVID-19-related sales and decreased demand from China. Over the long-term Danaher consumables and equipment will be key picks and shovels for branded and generic biologic medicines. 

PAST PICKS:

Fomento Economico Mexicano (FMX NYSE)

• Then: US$94.99
• Now: US$119.38
• Return: 26%
• Total Return: 28%

Analog Devices (ADI NASD)

• Then: US$181.14
• Now: US$171.21
• Return: -5%
• Total Return: -5%

Nutrien (NTR TSX)

• Then: $94.77
• Now: $73.90
• Return: -22%
• Total Return: -21%

Total Return Average: 1%