Christine Poole, chief executive officer and managing director, GlobeInvest Capital Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

Restrictive monetary policy is slowing economic growth. Due to the lagged effect of monetary policy, the impact of higher interest rates and borrowing costs will be more fully felt in 2023. Tighter financial conditions for households and businesses will dampen consumption and investment as well as increase the cost burden of existing debt. The leading indicators we track signal a broadening economic slowdown, although the depth and duration remain to be seen.

Given the significance of the consumer sector in many developed economies, the overall features of the consumer debt profile are relevant in assessing the impact of higher interest rates. According to a study by Wells Fargo, Canada stands out as having one of the highest ratios of household debt to disposable income, at 184 per cent, and interest expense to disposable income, at 7.2 per cent. These metrics suggest a higher sensitivity to rising interest rates for Canadian households than in other countries.

A positive longer trend for the Canadian economy is the robust immigration targets set by the government to approve 500,000 new immigrants per year through 2025. The influx of new residents is equivalent to 3.8 per cent of Canada’s population.

Equity markets are forward-looking, constantly trying to anticipate events that are in the future. How they attempt to anticipate recessions is no different. Historically, for both the TSX Index and S&P 500 Index, when a negative gross domestic product (GDP) year occurs, stocks are usually down the prior year and up in the year the recession actually occurs. With both Canadian and U.S. indices realizing negative returns in 2022, time will tell whether this trend holds if a recession unfolds in 2023.

Accurate macroeconomic forecasting is nebulous at best. Investors should maintain cash reserves to sufficiently fund near-term liquidity needs with longer-dated funds invested in a diversified portfolio consisting of companies with strong fundamentals that can withstand the economic cycle.

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TOP PICKS:

Alphabet (GOOGL NASD)

Recent purchase price $91 range in January 2023

Alphabet is a global technology company, providing the world’s leading search engine, Google, and dominates in both global desktop and mobile search engine queries. The company is a beneficiary of the shift to online advertising, offering various digital advertising tools powered by artificial intelligence. Other revenue streams include Google Cloud, YouTube, and Google Play.

Aritzia (ATZ TSX)

Recent purchase price $47 range in January 2023

 Aritzia operates in the women’s apparel industry, offering an assortment of exclusive in-house brands at attainable price points that appeal to a wide demographic, coined as “everyday luxury.” Aritzia has strong unit growth potential in the U.S. as well as a growing e-commerce platform. Other sources of future growth include expansion into new categories and broadening existing product lines.

Visa (V NYSE)

Recent purchase price $222 range in January 2023

Visa is a global payments technology company, operating the world’s largest retail electronic payments network and providing financial institutions with a broad range of platforms for consumer credit, debit, and prepaid payments. Visa benefits from the ongoing global secular shift from cash and cheques to card-based and electronic digital payments. Visa is also a natural beneficiary in the growth of e-commerce and online retail spending. Visa offers a dividend yield of 0.8 per cent.