Darren Sissons, partner and portfolio manager, Campbell, Lee & Ross

FOCUS: Global and technology stocks 

MARKET OUTLOOK:

We have seen four major systemic breaches in under 12 months. This includes the U.K., pension crisis and the failure of two U.S. banks, followed by the forced acquisition of Credit Suisse by UBS. Please recall, a systemic breach is a high-risk market event as it significantly enhances the risk of negative price spirals and cross-asset class contagion. In 2008 for example, most financial markets melted following the systemic failures of Bear Stearns and Lehman Brothers. Buyers disappeared. Securities fell significantly. Except for a small group of securities such as credit default swaps, the downward price spiral across asset classes reached full-blown contagion and hit both investors across multiple asset classes and the economy very hard. 

The risk of major systemic pain has unfortunately reared its head again. To counter that risk, the U.S. Federal Reserve increased its benchmark rate by only 0.25 per cent on March 22, 2023, when consensus estimates expected 0.50 per cent prior to the recent Credit Suisse failure. The accompanying Fed notes to the interest rate hike provided ample room for a dovish tilt if necessary. Consequently, market stabilization and the cooling of systemic risk have emerged as the primary economic near-term concern with inflation falling to a secondary, but pressing longer-term risk. 

Given the above, investors continue to operate in a tactical market, which requires active management. A well-managed buy-and-hold portfolio methodology is a proven value-creating strategy longer term. However, that strategy is not optimal during periods of heightened systemic risk and sustained market volatility. A better approach is a modified buy-and-hold strategy that includes some opportunistic trading when appropriate.

Investors are encouraged to revisit risk management protocols in light of the heightened systemic risk. Trim overweight positions, raise a cash cushion and consult your circle of experts on best practices. Equally so, heightened risk typically drives a plethora of new opportunities and investors should be open to new ideas.

Inflation remains a persistent threat. Investors should seek some exposure to sectors that benefit from inflation including commodities, staples, and pharmaceuticals with defensive business models and rising dividends. Once interest rates settle and charges relating to loan defaults moderate, financial exposure is a must. REITs round out the allocation required for the current market dynamic once higher rates are fully reflected in share prices.  

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TOP PICKS

Northrop Grumman Corp (NOC NYSE)

The Peace Dividend, in which countries scaled back defence spending post-Gorbachev’s opening up of Russia via his policies of Perestroika and Glasnost, has now definitively ended post the Ukraine invasion. European countries coupled with Asian nations’ concern about China’s international ambitions are increasing military spending. That spending increase is a direct beneficiary to military contractors.

Key earnings catalysts for the company include the B21 stealth bomber program, the upgrade of the U.S. nuclear arsenal and space programs. High-quality receivables as clients are typically governments. It has 19 years of dividend increases with periodic share buybacks.

TC Energy Corp (TRP TSX)

New TC Energy investors benefit from a sector-wide energy sell-off that drove its dividend yield to 1.70x multiple of money market returns. Equally so, given reasonable quality bonds pay 4.5 per cent - 5.5 per cent without capital gain potential a +7 per cent dividend yield is attractive.

While there is some concern over the leverage quantum, a close inspection of the debt maturity stack shows no major re-financing needs until post-2033. Equally so, given the maturity profile, much of the near-term expiring debt will re-price at equivalent prices or better terms vis-à-vis when it was initially added.  

There is some expectation of asset sales as well, which will reduce debt. Energy is an inflation beneficiary as was made painfully obvious during the 1970s energy crisis.

Visa (V NYSE)

The transition to digital payments is a well-known catalyst that will continue to reward. It’s a direct beneficiary of inflation, which will drive higher volumes and travel which carries higher margin revenue. A rising dividend, currently yielding 0.8 per cent which has grown at an average of 19 per cent and 25 per cent, respectively over the five and ten-year periods. Buybacks averaged 2.4 per cent per annum over ten years.