Michael Sprung, President, Sprung Investment Management

FOCUS: Canadian Large Caps

_______________________________________________________________

MARKET OUTLOOK:

North American markets have continued to advance thus far in the year at an erratic and slow pace. It is as if investors are climbing an ever steeper wall of worry as the year advances despite some positive economic news. Housing and automobile sales have proved resilient as the employment picture in the U.S. has improved.  Yet, after significant recovery since the 2008 financial crisis, investors are focusing more and more on the potential negatives on the horizon. In particular, a great deal of concern has been centered on the Federal Reserve's intentions to either raise interest rates or leave them at the current historically low levels. In this regard, the authorities face a conundrum. Raising rates would send a signal that the economy is strong enough to contemplate a normalization of the rate structure. On the other hand, the tepid pace of the recovery with the substantial increases in debt levels (largely enticed by low interest rates), combined with the very strong current value of the US dollar, creates the fear that any increase in rates could stall the economy.

In addition, a growing political backlash against globalization and free trade is evident in both Europe and the U.S. More immediate concerns are also growing over the implications of a possible Brexit (Britain leaving the European Union) that will be decided in a referendum in two weeks time. In Asia, massive debt levels within the shadow banking system in China are also making investors nervous. The fact that Japan deferred a sales tax increase also indicates that that economy continues to languish.

After a number of years of expansion fueled by debt, we could be entering a period of deleveraging that will stall global economic growth for a period and potentially caused markets to decline and volatility to increase. Investors should be prepared to take advantage in these circumstances to invest in well financed, well managed companies.

Top Picks:

Bank of Nova Scotia (BNS.TO), Last Purchase March 4 2016 $58.75

The Bank of Nova Scotia is the most international of the Canadian banks with branches in the Caribbean, Central and South America.  In the most recent quarter, provisions for credit losses were up substantially, particularly with respect to the energy sector. Given BNS's presence in markets with large commodity exposures, its premium valuation has fallen to a level investors should find more compelling. The dividend yield is now greater than 4.5 percent.

Vermillion Energy Inc. (VET.TO), Last Purchase March 24 2016 $43.31

Vermillion Energy has interests in oil and gas producing properties in Western Canada, France, Germany, the Netherlands and Australia as well as a substantial non-operated interest in the Corrib natural gas field off the northwest coast of Ireland. Vermillion is well managed with a solid balance sheet. At today's commodity prices, Vermillion generates free cash flow that supports the current yield of 6 percent. Its geographically diversified operations should contribute to a growing production profile over the next few years.

Fortis Inc. (FTS.TO), Last Purchase March 24 2016 $40.08

Fortis is the largest investor owned gas and electric distribution utility in Canada with operations in the US and Belize. Over the next few years, Fortis is expected to significantly increase its rate base. Two years ago, Fortis completed a transformational acquisition of UNS in Arizona. This year, the Company is engaged in another major acquisition of ITC Holdings Corp., the largest independent fully-regulated electric transmission company in the US for $11.3 billion. This will be another transformational exercise that will enhance regulatory diversity and significantly increase the geographic footprint of operations and create opportunities to enhance shareholder value.

Past Picks: June 8, 2015

Alaris Royalty (AD.TO)

• Then: $30.89
• Now: $28.48
• Return: -7.80%
• TR: -2.12%

ARC Resources (ARX.TO)

• Then: $21.76
• Now: $21.74
• Return: -0.09%
• TR: +5.39%

CAE (CAE.TO)

• Then: $15.01
• Now: $16.59
• Return: +10.52%
• TR: +12.74%

Total Return Average: +5.34%

Website: www.sprunginvestment.com