COMMENT
Market For almost a year now people have been talking about a correction coming. Because we've had 9 years of pretty strong gains in equity markets there is still optimism left in the market. Referring to Jerome Powell comment from the FED yesterday, after seeing just a small glimpse of good news we see buying coming back into the market. Looking at 2019 you have to ask yourself whether you are in the camp of things slowing down and being more defensive, or if that was just a little breather in the market and if we are going to get back to rosy days. He tends to be more conservative, thinks now is an ideal time to become more conservative heading to 2019. Doesn't see the same type of growth catalyst for 2019. Not overly optimistic.
COMMENT
Interest rate hikes slowing down Going into this year they reduced their weight to interest sensitive and defensive equities such as utilities and telcos, and those names did suffer in the first half of the year. As we went through the year central banks have soften their language both in Canada and the U.S., and now we are seeing these defensive names becoming popular again. Tech is down 9% within this quarter, whereas the defensive names they like such as utilities are up 4%. Seeing a shift back into defensive and interest sensitive names.
COMMENT
Dividend growers or dividend yield? It's always about dividend growers as it speaks more about the overall wealth of the company. If you are too focused just on the yield and you buy a company that pays a 5-6% dividend without looking at the fundamentals, their ability to raise de dividend may be impaired, and not only that but the share price may also go down more than the dividend yield.
COMMENT
Move from bond ETFs to preferred shares or floating rate ETFs Just because the word bond is present doesn't mean that it can be synonymous with safety. Even in the world of bonds there is a wide range of risk ranging from governments bonds all the way to the other extreme being high-yield bonds. Preferred shares can be seen as fixed income part of a portfolio but it is important to recognize they don't have the same characteristics as bonds. The good is that the tax treatment of preferred shares is generally as a dividend, so if investing in a non-registered account you get the benefit of paying less tax on the yield. The bad is that they rank lower should things go bad with the company. If you are a bond holder you get paid ahead of a preferred share holder. There are several different types of preferred, such as perpetual which are very sensitive to interest rate, all the way to fixed rate-resets, and there is other considerations there. Preferred shares can be an alternative to bonds but it is not as simple as looking at the yield, from tax to credit quality, as well as what type of preferred you buy.
COMMENT
Undervalued? Familiar with it but doesn't own it. Anytime you're looking at the financial players especially if they are Canada-centric you want to understand if there is any mortage business and what that book looks like. He is concerned about Canadian household debt now that we see rates start to rise. The discount that you see often in the smaller financial centers in Canada is not that the market is not aware of it or that it's a bargain, it's more to speak to the fact that there is risk in being concentrated on the Canadian economy.
BUY
They reported overall pretty good earnings. You have to be patient they've only recently entered the U.S market and it's going to take time. TD has the first-mover advantage there and they have benefited more significantly from the U.S. Thinks now is a good buying opportunity as a long return play. Historically anytime the yields of the Canadian banks get in the high 4-5% it's always been a great buying opportunity. Current yield is pushing up against that 5% number.
COMMENT
He is cautious and not overly optimistic. Growth is slowing and interest rates are still on the rise. Thinks it's prudent to have some cash going through 2019. Depends what your options are, if you have the ability to invest in private markets he would have a lower cash weighting, but otherwise if you are more focused on public markets seeing 10-20% cash would not alarm him. Also depends how active you are, if you are an active manager of your assets you can have more cash and penny pinch on the days when markets sell-offs and add. If you are sort of a leave it and not look at it then you are likely to have less cash, closer to 10%, and look for a more meaningful correction to buy.
COMMENT
He thinks that a lot of the easy money has been made. Although interest rates are going up, what they are paying on the deposits is not much less then what they are loaning the money out. The historical benefits of net interest margin are not being realized to the fullest at this time. You do need to have financials in your portfolio. He would not be going into 2019 overweight financials. Bank of America is a great name, its conservative, and well diversified but he just don't think we are in an environment where you are going to want to be overweight in the banks.
DON'T BUY
Vermilion (VET-T) vs Crescent Point (CPG-T) Neither of the two. Not overly optimistic on energy. He is underweight energy and sees little opportunities. Doesn't see supply cutting down anytime soon and we need that to happen for oil prices to rise. Prefers Suncor (SU-T) which is more conservative and integrated and has a decent dividend.
DON'T BUY
Vermilion (VET-T) vs Crescent Point (CPG-T) Neither of the two. Not overly optimistic on energy. He is underweight energy and sees little opportunities. Doesn't see supply cutting down anytime soon and we need that to happen for oil prices to rise. Prefers Suncor (SU-T) which is more conservative and integrated and has a decent dividend.
PAST TOP PICK
(A Top Pick Dec 06/17, Down 27%) Hasn't had a great year. Had a miss in Q3 and the stock has been punished since. The tariffs haven't helped the story because the market doesn't really undestand the impacts. Although it trades on the TSX, much of their operations is actually in the U.S. The decline is justified but thinks 25% is overdone. Still holds it and adding to it patiently and strategically.
PAST TOP PICK
(A Top Pick Dec 06/17, Up 14%) Regional bank in the U.S. They only open 3-5 branches a year, 5% or so loan growth a year. Not a Blockbuster growth story and more of a boring name, but he has a lot of time and patience for it. Had a good year, decent dividend. Still owns it.
PAST TOP PICK
(A Top Pick Dec 06/17, Down 10%) Had much of its run last year and has been readjusting and rebalancing this year. When looking at the regional banks overall it's been a great place to be.
COMMENT
Wall street banks vs smaller regional banks in recessionary environment? It depends if the earnings are coming from banking operations or wealth management and investment banking. You have to ask yourself what exposure you want to consumers. He feels pretty optimistic about the U.S. consumers primarily due to debt to income ratio being considerably lower in the U.S. vs Canada.
COMMENT
It's a yield play. It's difficult to see a scenario for meaningful growth without the approval of future pipelines. Prefers the utilities because unlike the pipelines he does see some share price appreciation potential as well. Great yield at about 5.1% but growth is a challenge.