One week into 2020
A week has barely passed in 2020, and already markets have already been rocked by the threat of war between the U.S. and Iran. That drone attack shattered weeks of several all-time highs.
Will this be a short-lived skirmish or all-out war?
No one knows, and investors well-are advised to have a plan for each outcome.In fact, let’s look at several outlooks and determine which stocks and sectors you should buy (or avoid) in the coming 12 months.
BDC, Canada’s entrepreneur’s bank, expects our economy to continue to grow at 1.7%, driven by real estate and consumer spending.
Casting a shadow over our growth lies abroad: trade tensions, the U.S. election in November and Brexit. The trade wars launched by America slowed global growth to 3% in 2019 and will slash almost $700 billion this year. Even if China and America sign phase one, uncertainty persists. The saving grace will be continued low interest rates, plus improving economies in India, Russia and Brazil.
What to expect from the stock market in 2020?
Meanwhile, Bay Streeters expect the TSX to reach anywhere from 17,750 to 18,500 in 2020, with energy, materials, and financials to outperform.
Top Energy Stocks Predictions for 2020
Eric Nuttall, who specializes in oil stocks, names Baytex, Crescent Point and Tourmaline as his top picks. Most oil stocks pay generous dividends. CPG-T, for example, yields nearly 8% (disclosure: I own this).
Here are Eric Nuttall‘s top oil stocks outlined:
A Calgary based oil and natural gas company. A junior stock that is trading below book value, with good assets in shale in Texas. A well-managed company that was chosen as a Top Pick by Eric Nuttall in mid-December.
(A Top Pick Jul 19/19, Down 80%) A good reminder it is not how you start the year, but how you finish. He thinks energy prices will recover before year end. He no longer owns it. They had higher leverage than its peers. Their non-operated crown jewel is in the Eagleford. He thinks that became…
A Canadian oil and natural gas company. They have assets mainly in North Dakota and Southern Saskatchewan. The company continues to buy back stocks.
(A Top Pick Jul 19/19, Down 56%) They did an awesome job monetizing some assets, including their Uinta holdings while getting good pricing. They will generate free cash flow as oil prices recover. They have good hedge positions. When interest levels returns to the space it should see a big rebound in value.
A big natural gas producer that continues to buy back stocks. They spun out some of their infrastructure into a royalty offering that gives them liquidity to make acquisitions.
Natrual gas prices? The 2021 strip price for AECO is over $2. That will work for strong balance sheet producers like TOU, NVA (60% natural gas), and ARX.
Top Materials Stocks for 2020
Here are Jaime Carrasco‘s top material stocks outlined:
A major Canadian gold producer with operations in North America and Finland. They operate in lower geopolitical risky areas. New mines are producing and they have increased their dividend by 40%.
They are a senior gold producer operating in low risk regions. They are not reliant on just a few mines. She does not have much gold exposure their portfolios, but this would be a good one to hold.
A financing company for precious metal mining companies. The company has good cash flow and continues to buy back shares. They have a mine in Turkey that will go online in the next few years that will help the stock jump higher.
The analysts are very slow to raising their earnings forecasts with the price of gold. The rebound in earnings in some of these companies will be really something. He likes the producers as opposed to the commodity. Producers give you leverage due to the fast rising earnings. He likes the Juniors as well as ABX-T.
Top Financials Stocks in 2020
One of the leading Candian banks with US exposure. They have over 50% of their business in US retail space. Analysts expect a dividend increase, putting the yield at 4.5%.
Canadian Banks including TD-T and RY-T. He wishes we had earnings out of the banks because we are flying blind. It is hard to see anything positive out of then. The stocks have fallen a lot. His preferred is NA-T. It is hard to be materially bullish on the Banks unless you are a long…
The leading bank in Canada. A good income investment choice with yield at 4%. Higher interest rates would be beneficial to the banks. This could be a good entry point for banks.
Among the Canadians, RY, TD and NB are trading at small premiums to book value. These are solid choices with decent loan books. Canadian consumers have heavy debt and that is a problem, and this risk will rise as this slowdown continues. Can the banks long-term sustain their dividends? The banks are allowing customers to…
Playing the TSX with an Index ETF
A simple way to play the TSX would be an index ETF, such XIC or XIU, but the difference between the current 17,000 level to the most optimistic 18,500 is only 8.8%. Add to that the 2.8% yield (after the MER) of either ETF, and you will gain 11.6%.
Even better, wait for a market pullback of, say, 5% before buying a tranche to better your adds and gains. Though the TSX could fall deeper, nobody sees a recession coming this year. Hope they’re right.
An ETF that tracks the TSX closely. A good way to diversify with a low MER and get a broader exposure to Canada.
XIC-T is not tracking the index, TSX –T or TSX-60. The problem is the system. It does not look at dividends correctly. He finds that it tracks the TSX correctly. The TSX is identical to the XIC-T but tools online do not necessarily track the over all returns accurately.
An ETF that tracks the TSX60 large cap stocks. A low-cost way to get exposure to good names like the banks. One of the largest and oldest Canadian ETFs.
HXT-T vs. XIU-T. They have basically identical holding but one pays a dividend so has different tax treatment. He is indifferent. In a TFSA, there is no reason to not to use the XIU-T.
US Banks to Buy in 2020
JP Morgan predicts U.S. growth to slow from 2.3% last year to 1.7% in 2020 as the American consumer continues to spend. The bank sets a 2020 price target for the S&P at 3,400 with an EPS of 19x, which is the Wall Street consensus, but don’t expect the stellar performance of the past two years.
Rather, 2020 to be the “year of the Great Rotation II,” a repeat of 2013 when retail investors shifted from bond funds into equity funds. Also, JPM reflects Wall St. Consensus that the US dollar will show weakness, at least early this year. Oil should improve in 2020, given OPEC’s deeper production cuts, with Brent averaging US$64.50 per barrel.
One of the big American banks. A leader in the US banking space and a bellwether. A premier company that comes with a premium. Analysts expect to see continued dividend growth and steep earnings growth.
US financials? They own JPM as they have a well diversified business and strong balance sheet. GS is more a capital market sensitive company, which puts more pressure on them. She suggests having Canadian and US banks in your portfolio.
Wells Fargo is a little less optimistic. It calls for 1.8% growth; targets 3,200-3,330 for the S&P; and WTI between $55-65. For maintain global growth, consumers must continue to spend, fixed-income spreads must be “well-behaved” and the US-China trade war must de-escalate. WF favours tech, consumer discretionary and financials, but gives the thumbs-down to communication services and materials. It predicts large-cap’s EPS to rise 6.3%, but only 3% in mid-caps.
An American bank that recently hired a new CEO, who was accepted by the market. There were some regulatory issues following fraudulent accounts that has hurt them. It now seems to be improving and has started to follow the other US banks.
The very big picture is that we are around generational lows in interest rates. Coming out of this you may see the long end of the bond market selloff and this is good for banks. In terms of solvency issues coming out of COVID that would be a real risk. He bought two others as…
More US stocks to buy in 2020
The ubiquitous coffee chain that has gone global. They have successfully expanded into China. They are in a very high margin business that continues to do well.
There is no in-restaurant service anymore. A lot of restaurants are closed now. Revenue will take a terrific hit. They are going to have to eat the lease payments. At the end of the crisis you will have the opportunity to buy into one of the premier fast food systems in the world. It will…
A computer software, cloud and service company. Their position in the cloud space is only disputed by Amazon. Their subscription business has continued to go well. A good long term hold.
One of the two biggest cloud companies (with Amazon). They have a huge base for Office software. They will continue to develop their Teams conference technology for work conferencing. They also have a videogaming and live sports business now in relation to virtual and augmented reality. They struck a deal with the NBA, which will…
The electric vehicle company that started the trend. It has been known to have high volatility. Valuation is very expensive but the stock continues to edge higher despite all the concerns.
Even the CEO said this stock is too high. He bought this in 2012, early, but since 2018, their sales have been flat. He sold. Tesla has run up as investors anticipate good sales in China. That's too optimistic. The Chinese and Europeans prefer buying their own cars.
Emerging Markets and China Stocks to Buy in 2020
After two weak years, emerging markets are poised to enjoy a better, even upbeat 2020. While the U.S. Fed is expected to keep interest rates steady, EM central banks are expected to continued cutting rates. That’s the good news. The bad news depends on which country you’re investing in.
Russia, Mexico, South Africa and Argentina are wrestling with political and economic difficulties, including debt repayments. India has its bulls, but also bears. XID-T plays India, though VEE-T covers Asia, including India but excluding Japan. India has great promise, but hasn’t blossomed into a powerhouse like its neighbour, China. In fact, her economy remains sluggish.
An ETF that covers India broadly. The country has a growing middle class with upwardly mobile, English speaking workforce. It is a bet on India and it’s growing population that is set to surpass that of China.
VEE vs. XID VEE covers EM. XID: India has a young working population who speak English. India fits well into global commerce. If they build their infrastructure, India will do well. Problem is, everyone knows India's long-term story and already have high expectations. India has been underperforming the past year, so he wants to see…
An ETF that covers emerging markets broadly. A good long term buy that is one of the best emerging market ETFs in Canada. The MER is 0.25% and covers India as well.
More of higher risk, higher return holding. It has a lot of weight in China (37% of the portfolio). Global growth will start to participate in the growth seen in industrial markets recently, he thinks. MER 0.24%. Yield 2.65%
In contrast, China remains the biggest economy in emerging markets though her growth will likely continue to slow in 2020: the IMF estimates 5.8% GDP growth, the World Bank 6.1%. Trump’s tariffs and the trade war hurt Chinese stocks in 2019 (and harmed American productivity as well), but the scheduled signing of phase one of the trade deal has lifted a lot of tension.
China will also benefit if the American consumer continues to buy. Bay St. remains bullish on Alibaba and Tencent. But investors either believe in the Chinese economy and the transparency of its financial reporting, or they stay out altogether.
The Amazon of China. The stock has been hit due to the US-China trade war and uncertainty over China. The price has remained the same for a few years. There is no dividend, and has a PEG ratio of over 50.
They're not in trouble. They're dominant in China. Chinese stocks may be delisted from US stock indices as a protectionist backlash, but BABA is fine. Has a concern about its corporate governance, like what it really owns, but overall he's fine with BABA.
The largest online advertiser and gaming space. It is getting into fintech and cloud storage as well. It is one of the largest internet companies in the world based on revenue and market cap.
This didn't come down much during the pandemic. Has good growth and diversification. Has its own payment system. Actually, this sold off last year during the trade war, but has held in this year like a rock. They are solid. Has good growth ahead. (Analysts’ price target is $56.67)
After gleaning several 2020 outlooks, I can report: sluggish world growth, low yields, but also low or flat interest rates. Risk assets will grind higher while the U.S. dollar will soften. Gold will continue to be a hedge against uncertainty. Trade tensions between the U.S. and China will decrease, but remain on the table.
After all, both the Republicans and Democrats will talk tough about China during the election campaign, a campaign that will play a huge role in 2020 markets. There’s little chance of recession this year, but geopolitical tension remains, as we are experience now with Iran and America. Expect more volatility.
Have a good 2020!