Michael Sprung, president of Sprung Investment Management
FOCUS: Canadian large caps
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MARKET OUTLOOK

As we approach the end of the third quarter, many of the issues that concerned investors at the beginning of the quarter are still prevalent and perhaps gaining in their prominence. Global trade policies continue to be of concern insofar as the prolonged post-war period of opening markets and less restrictive trade barriers are threatened by populist political trends. The renegotiation of NAFTA also began. The formal Brexit discussions have yet to take place but the posturing on both sides has begun. Even within Britain, various trade, labour, professional and political groups are at odds as to the direction those talks should take. The members of the European Union are equally in disarray as to the desired outcome. Also, the insular approach of the new U.S. administration will undoubtedly have global ramifications as the interconnected machinations of international trade will all be affected.

Rising interest rates after such a prolonged period of very low rates raise other concerns. The recovery since the financial crisis of 2008 has been characterized by a period of very slow growth. While current economic data points to accelerating economic growth, the sustainability of that growth in a rising rate environment will be tested. During this period there has been a massive increase in the amount of government and consumer debt that will become a significant burden in a rising rate environment.

Geopolitical tensions also continue to escalate, particularly between the U.S. and North Korea. While investors have tended to be somewhat sanguine with respect to geopolitical issues, an outbreak of tensions in Asia, the Middle East or central Europe would quickly be discounted in the global markets.

The pace of technological change is accelerating and reshaping industries. Many tensions will arise from this evolution that will exacerbate trade disagreements and labour markets. Given all of the dynamics of rising rates, trade policies, technological progress and other geopolitical issues, we would suggest that this is a time to be very cautious.

TOP PICKS

ALARIS ROYALTY (AD.TO)
Alaris Royalty invests in a diversified range of North American private companies with the objective to generate cash flows to support dividends to shareholders. Problems within a number of investees over the past year have hindered progress. Many of these concerns have largely been dealt with and now the company is poised to enter a renewed period of growth. The recent investment in Sales Benchmark Index , LLC is the largest single investment Alaris has made to date at US$85 million. Following the full redemption received from Sequel, this investment in SBI goes a long way in replacing the cash flow displacement. Last purchased November 7, 2016 at $19.84.

VERMILION ENERGY (VET.TO) 
Vermilion 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. Vermilion is well-managed with a solid balance sheet. At today's commodity prices, Vermilion generates free cash flow that supports the current yield of 6.25 per cent. Its geographically diversified  operations should contribute to a growing production profile over the next few years. Last purchased September 16, 2016 at $46.51.

FORTIS (FTS.TO)
Fortis is the largest investor-owned gas and electric distribution utility in Canada with operations in the U.S. and Belize. Over the next few years, Fortis is expected to significantly increase its rate base. Over the next five years, management anticipates capital expenditures in the order of $12.9 billion. The company is extremely well-diversified by asset type, geographic location and regulatory regimes. Going forward, management's focus is anticipated to be more on organic growth within its exisiting markets as opposed to M&A. Fortis has a history of dividend increases that are expected to continue. The stock currently yields 3.5 per cent. Last purchased November 18, 2016 at $40.08.
 

PAST PICKS:  NOVEMBER 4, 2016

HOME CAPITAL GROUP (HCG.TO)

• Then: $25.44
• Now: $14.26
• Return: -43.94%
• Total return: -42.84%

CENOVUS ENERGY (CVE.TO)

• Then: $18.47
• Now: $11.02
• Return: -40.33%
• Total return: -39.74%

THE NORTH WEST COMPANY (NWC.TO)

• Then: $25.14
• Now: $30.04
• Return: 19.49%
• Total return: 23.33%

TOTAL RETURN AVERAGE: -19.75%