David Driscoll, president and CEO, Liberty International Investment Management

FOCUS: Global stocks 

MARKET OUTLOOK:

If the U.S. Federal Reserve lowers interest rates in 2024, the winners should be small-cap, emerging market and value stocks. On the fixed-income side, long-term bonds and perpetual preferred shares should perform best. If rates stay the same next year, value stocks should be the most attractive because of the lower price-earnings multiples and the higher dividend yields offered.

If the U.S. dollar falls in accordance with a drop in U.S. interest rates in 2024, emerging market stocks and U.S. multinational stocks would be favoured. On an earnings basis, the S&P 500 Index currently trades at 22 times earnings (investors are willing to pay US$22 for $1 of profits), while the Emerging Market ETF trades at just 14.1 times earnings. The opportunity, therefore, is in the emerging markets where the population is younger than in North America and economic growth rates are higher (think India or Mexico).

Meantime, investors should note that dividend stocks are still the best way to grow your portfolio. Two-thirds of performance comes from rising dividends and the re-investment of those dividends, not stock prices. And as dividends grow over a decade, the share price often follows.

For retirees or those heading into retirement, tech stocks are not the way to go because most don’t pay dividends and they tend to be 1.5 times as volatile as the rest of the stock market. Additionally, if you’re drawing down your portfolio to pay for living expenses, a 33-per-cent drop in the Nasdaq Composite as in 2022 could have been a recipe for disaster.

Regardless of what happens in 2024, investors must maintain discipline, avoid correlated stocks in the portfolio, diversify globally and let dividends, dollar-cost averaging, time and compounding be your friends, not your enemies. 

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TOP PICKS:

COGECO COMMUNICATIONS (CCA TSX)

Yields 6.42 per cnet and is the smallest telecom in North America with better metrics than its larger competitors on both sides of the border. It’s coming off its $50.69 price low subsequent to the sale of shares held by Rogers Communications. Cogeco’s long-term dividend growth rate has been 10 per cent annually, about twice as large as the others and the company can cover dividend increases because of growing free cash flow. An investor needs only a four per cent annual price increase to earn a total return of 10 per cent a year.

ATRION CORP (ATRI NASD)

It is a leading supplier of medical devices and components to niche markets in the health care and medical industry. Its proprietary products, ranging from cardiovascular and ophthalmology products to fluid delivery devices, are sold to end-users, distributors and other manufacturers worldwide. If interest rates fall in 2024, small caps like Atrion should be a major beneficiary. Also, re-stocking of products from customers should provide with pricing power and a return of higher earnings. The dividend yield is currently 2.42 per cent and it has more current assets than total liabilities, providing it with plenty of cash to invest in research and development for future growth.

JARDINE MATHESON HOLDINGS (JM SP) 

It is a conglomerate that owns the Mandarin Oriental hotel chain, Maxims restaurants, Mercedes and BMW car dealerships, construction equipment sales and leasing, land development grocery stores, Ikea and Starbucks franchises and insurance companies throughout Southeast Asia. The stock yields 5.5 per cent. The dividend growth rate is back to 10 per cent annually, it trades at 0.4 times book value, has a price/sales ratio of 0.3 and will benefit from a rise in the Indonesia Rupiah if the U.S. dollar falls. Some investors worry about its China exposure but that’s only 25 per cent of revenues. Indonesia is its biggest revenue source.

PAST PICKS: December 29, 2022

Fomento Economico Mexicano (FMX NYSE)

• Then: US$79.35
• Now: US$131.86
• Return: 66%
• Total Return: 69%

Chubb (CB NYSE)

• Then: US$222.08
• Now: US$219.74
• Return: -1%
• Total Return: 1%

Svenska Handelsbanken (SHBA STO)

• Then: 106.25 SEK
• Now: 108.20 SEK
• Return: 2%
• Total Return: 11%

Total Return Average: 27%