Paul Gardner, partner and portfolio manager at Avenue Investment Management

Focus: REITs, bonds and dividend stocks
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MARKET OUTLOOK
Since the U.S. election, global stock markets have rallied strongly. U.S. profit growth, combined with stronger than expected GDP and employment growth, has help fuel the rally in equities. We would suspect a small correction is coming due the length of this bullish rally and the usual summer season weakness. Even after saying that, we do believe that growth in the U.S., Europe and Japan will keep the stock markets healthy. Adding to that health is probable tax reform in the U.S. that will allow companies to flow through their tax savings to higher earnings levels. This should create a virtuous cycle in the short term.

The bond market is complicated. Global interest rates have risen away from emergency lending levels and are now starting to normalize. These levels make it much safer to own medium-term debt such as five- to 10-year bonds. Avenue believes the curve will continue to “normalize” and that reflation will occur in a small measure. Interest rates should be range-bound over the next year with the Bank of Canada possibly raising rates in spring 2018. The Federal Reserve will be hiking the overnight rate at least two times this year.

TOP PICKS

BAYTEX BOND 6.625% JULY 19, 2022
We bought these bonds through the oil collapse last year. Baytex has two major assets: A heavy-oil business in Canada and shale ownership in Eaglesford, Texas. The U.S. asset is one of the richest oil and gas deposits in North America. We believe that this asset more than covers the debt obligations of the bond in case the company gets under stress. We believe a seven per cent yield is fair compensation in the high-yield space.

BTB REAL ESTATE INVESTMENT TRUST (BTB_u.TO)
We have held this REIT for a long time. Distribution has been steady, giving us a nine per cent yield. BTB focusses on multi-asset or diversified asset classes in eastern Ontario and Quebec. Management executes well on their acquisition properties. The REIT trades slightly below NAV and is considered inexpensive relative to the REIT universe.

MAINSTREET EQUITY CORP. (MEQ.TO)
Mainstreet’s Alberta properties have experienced weakness and vacancy issues due to Alberta’s high exposure to the depressed oil and gas market. Mainstreet is protected by a third of their assets that are located in Surrey, B.C., where properties are performing well. The company focuses on low-rise apartments, which have been hurt less than the high-rise apartment market. The Alberta rental market is starting to recover and MEQ is well positioned from a balance sheet perspective, picking up inexpensive apartments while working their way through the vacancy weakness.
 

PAST PICKS: MARCH 28, 2017

BCE (BCE.TO)

• Then: $58.91
• Now: $61.08
• Return: 3.68%
• TR: 3.68%

AUTOCANADA (ACQ.TO)

• Then: $21.44
• Now: $18.37
• Return: -14.31%
• TR: -13.86%

BAYTEX BOND 6.625% JULY 19, 2022

• Then: $97.00
• Now: $98.00
• Return: Not Applicable
• TR: 5%

TOTAL RETURN AVERAGE: -1.72%