Gavin Graham, chief investment officer, SmartBe Investments

FOCUS: North American and global large caps 

MARKET OUTLOOK:

The North American central banks have made it plain they are willing to continue raising interest rates if inflation remains above the two per cent target, despite Bank of Canada Governor Tiff Macklem announcing a pause after the most recent rise to 4.75 per cent. He made it plain it was data dependent and the recent minutes from the U.S. Federal Reserve meeting showed the Fed governors felt the same.

As a result, 10-year bond yields have backed up to nearly four per cent again. The yield curve between two-year bonds and 10 years remained steeply inverted (4.6 per cent versus 3.9 per cent) which has a near-perfect record of predicting a recession.

Equities had the best January for a couple of decades. The major losers of 2022, such as the FAANG+ stocks leading, seem ahead of themselves, especially as earnings and margins are under pressure from rising costs.

Investors should have some short-term bonds to reduce volatility and focus on stocks selling at reasonable valuations with decent balance sheets and paying sustainable dividends. These include energy, utilities, telcos and industrials while having between five and 10 per cent in gold and precious metals, which are non-correlated with either bonds or stocks.

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TOP PICKS:

Agnico Eagle (AEM TSX)

Last purchase: December 2022 $59.40

It is the third largest gold miner globally with a 2022 output of 2.5 million oz. Agnico has successfully completed two major acquisitions in the last year, taking over Kirkland Lake Gold and the Canadian operations of Yamana, including the other 50 per cent of the giant Canadian Malartic mine in Quebec. While the stock has sold off on disappointment over higher forecast costs in 2023, Agnico’s long track record of operational delivery should reassure investors. Down 25 per cent from its high a year ago, it yields 3.5 per cent. 

Definity Financial (DFY TSX)

Last purchase: October 2022 $38.50

The recently demutualized holding company for the Economical Mutual Fire Insurance Company founded in 1871, Definity is the sixth largest property and casualty (P&C) insurance company in Canada. Management has made the company profitable writing insurance and its Sonnet brand, (10 per cent of sales) is the largest direct-to-consumer insurer and it has a strong position in pet insurance. While up 50 per cent from its initial public offer in late 2021, it is reasonably priced at 16 times earnings and yields 1.5 per cent.

Pason Systems (PSI TSX)

Last purchase: December 2022 $15.96

Pason Systems is a leading global provider of data management systems for drilling rigs and latterly solar farms. With no debt and over $200 million in cash on its balance sheet it was able to survive the COVID-19-inspired collapse of activity in 2020-21 and has been reporting earnings that have tripled to $71.2 million on revenues up two-thirds to $240.6 million on the first nine months of 2022. It is reasonably valued at 14 times earnings and the dividend was recently raised 50 per cent to $0.12 per quarter, giving a yield of 3.5 per cent.

PAST PICKS: March 4, 2020

GSK plc (GSK NYSE)

• Then: $43.35
• Now: $34.56
• Return: -22%
• Total Return: -9%

Richards Packaging Income Fund (RPI.UN TSX)

• Then: $42.54
• Now: $38.00
• Return: -11%
• Total Return: -3%

Pan American Silver (PAAS TSX)

• Then: $29.54
• Now: $19.69
• Return: -33%
• Total Return: -31%

Total Return Average: -14%