Chris Blumas, portfolio manager, Raymond James Investment Counsel

FOCUS: North American large caps 

MARKET OUTLOOK:

The possibility of lower interest rates is the main catalyst that has driven stock prices higher since the start of the year. However, the U.S. Federal Reserve and financial market participants have different views about when interest rate cuts will occur. While monthly inflation continues to roll down in the United States, it appears unlikely that the Fed’s two per cent inflation target will be reached this year and this fact does not support an interest rate cut before the end of 2023.

The modern economy is addicted to credit, and higher interest rates hurt governments, businesses and consumers. Higher rates are likely to force these participants to slow their borrowing and the recent turmoil in the U.S. banking sector is likely to force some banks to curtail their lending. These two forces are immensely powerful and are likely to have a negative impact on economic growth and increase the odds of a recession in the short term.

While the depth and duration of a potential recession are uncertain, I think that investors should remain well-diversified and defensively positioned and avoid the temptation to exit the markets and wait on the sidelines. There are pockets of value in today’s markets and history has shown that patient investors are rewarded for controlling their emotions and staying invested. Sectors that look to offer attractive value in today’s market include financials, healthcare, energy infrastructure, financials, REITs, and utilities. 

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TOP PICKS:

Enbridge (ENB TSX)

Most recent purchase at $52.52 on April 6, 2023

Enbridge is a North American-focused energy infrastructure company with a lower-risk business model. The company has low commodity price exposure, strong contracts, good asset diversification, and low counterparty risk. During prior energy price corrections, Enbridge produced strong operating performance and continued to grow its cash flow. In addition, the company has an attractive near-term capital program and the financial flexibility needed to pursue a self-funding growth strategy. The shares currently trade at 10x distributable cash flow and have a dividend yield of 6.6 per cent with a cash flow payout ratio of 65 per cent.

Abbott Labs (ABT NYSE)

Most recent purchase at $97.19 on March 24, 2023

Abbott is a medical equipment company with a strong international presence. The company’s two main profit centers are its diagnostic testing business and its medical devices business. Last year, this business accounted for more than 80 per cent of Abbott’s operating profit. Abbott is currently working through a decline in demand for pandemic-related diagnostic equipment. However, the company has a strong product portfolio that should help to drive organic growth over the medium term. The shares currently trade at 23x forward earnings and have a trailing free cash flow yield of four per cent.

TD Bank (TD TSX)

Most recent purchase at $80.66 on March 31, 2023

TD is a retail-focused North American bank. Its share price is down around five per cent year-to-date and has underperformed its peer group. The bank is awaiting regulatory approval to buy First Horizon (FHN-US), a U.S. regional bank headquartered in Memphis, Tennessee. The pending deal has spooked investors and left TD trading at a rare discount relative to its peers. While there are a few moving parts that are complicating the deal, TD has the upper hand in renegotiating the price and stemming the outflow of deposits. TD shares currently trade at 9.2x forward earnings and have a dividend yield of 4.4 per cent.