Paul Gardner, partner and portfolio manager at Avenue Investment Management
FOCUS: REITS, bonds and dividend stocks
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MARKET OUTLOOK

Global stock markets have rallied strongly. Canadian equity markets have been left behind despite strong earnings growth. Despite higher than expected GDP growth in Canada, we expect that Canadian equities will outperform its global counterparts for the rest of 2017. 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 possible 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 now are starting to normalize. The U.S. bond market has gone in the opposite direction from its Canadian counterpart. The surprise Bank of Canada rate hike creates uncertainty with the Canadian bond trying to “figure out” what to do with high growth and little to no inflation. That being said, current levels make it much safer to own medium term debt such as 5-10 years.  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. The core belief of low moderate inflation over the near term is still relevant.

TOP PICKS

ALTAGAS (ALA.TO)
The WGL acquisition will transform the company over the medium term.  This utility yields 7.5 per cent that has a good growth profile going forward. Asset sales will help fund  this large purchase. ALA currently trades at 10x Price/AFFO. The industry average is 12x.

BAYTEX 6.625% 2021
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 US 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 7 per cent yield is fair compensation in the high yield space

TD BANK (TD.TO)
The bank sector is general cheap. Most banks trade below 2x book value. Q3 results were very strong. Not only did TD “beat” on earnings and revenue, but their efficiency improved. We think their platform in the US will add significant value to their well regarded retail assets in Canada.  With a 3.8 per cent yield added, TD is a compelling investment. 

DH CORP (DH.TO)

• Then: $31.77
• Now: $25.49
• Return: -19.76%
• Total Return: -19.76%

JP MORGAN (JPM.N)

• Then: $58.77
• Now: $91.27
• Return: 55.30%
• Total Return: 61.47%

AECON CONV 5.5% DEC. 01, 2018

• Total Return: 7%

TOTAL AVERAGE RETURN: 16.23%

Website: avenueinvestment.com