Paul Harris, partner and portfolio manager at Avenue Investment Management
Focus: North American and global equities
After the U.S. election, focus very quickly turned to the policies that a pro-business Republican administration can push through. The most significant of these policies are tax reform, infrastructure spending, and decreased regulation on the banking and energy sectors. If these can pass, they should lead to increased economic growth, higher inflation and rising bond yields in the U.S.
The most impacted sectors by these changes in policies will be financials and energy. So, no surprise we are seeing those sectors run-up the most during the Trump rally. The market has run a little ahead of where fundamentals are, so it’s possible that we could experience a pullback based on fundamentals.
However, we are also in a seasonally strong part of the year and I think that although the market has run ahead of fundamentals, we expect this improving sentiment to move the market higher.
As I mentioned above, financials and energy have been the biggest movers post the election. A lot of this may stem from portfolio managers being under-weight those sectors before the election, and hence are playing catch-up to bring their weightings back to an appropriate level given the change in earnings expectations for those sectors. Sentiment had been too negative in those sectors.
Sentiment had been very negative leading into the election, and this led a lot of money to being on the sidelines. The risk for those people is that it becomes too painful to remain on the sidelines with the market running, and so they re-enter the market at elevated levels, which ends up pushing the market even higher. We really need fundamentals to show this level of optimism in 2017 to support where the market is currently.
I think we will see this dynamic play out into 2017, so in some respect it leads to us being cautious because fundamentals need to come through to support the market move. However, if economic growth and earnings do come through, then I think the risk is that the market rises even higher as people become more optimistic on the economy and earnings growth. This cycle can be self-re-enforcing as people who are missing out then jump into the market to participate. This momentum can get dangerous, so it is something we are watching.
I think there is no doubt that the U.S. economy is well positioned to grow strongly with some of the new policies from the Republicans, so for those reasons we remain positive on the stock market and on the U.S. economy.
GILEAD SCIENCES (GILD.O)
Gilead is a pharmaceutical company with drugs for Hepatitis C and HIV. The company trades at 8.0 times earnings, has a dividend yield of 3.0 per cent and a free cash flow yield of 13 per cent.
BLACKSTONE GROUP (BX.N)
Blackstone is a private equity firm. The stock trades at 10.5 times earnings and has a five per cent dividend yield. We believe that this is a great environment for private equity firms at they can harvest many of the investments they have made over the last several years. They raised $100 billion, which can be used if the market does poorly.
AutoCanada is an auto dealership company. The company offers a diversified range of products from sales, services and financing. The stock trades at 12 times earnings, has a dividend yield of 2.0 per cent and a free cash flow of $50 million per year.
PAST PICKS: FEBRUARY 11, 2016
FIRST SERVICE (FSV.TO)
- Then: $50.03
- Now: $72.14
- Return: 44.19%
- TR: 45.62%
BAYERISCHE MOTOREN WERKE AG (BMWYY.PK)
- Then: €67.18
- Now: €86.88
- Return: 29.32%
- TR: 34.93%
BANK OF AMERICA (BAC.N)
- Then: $11.16
- Now: $23.46
- Return: 110.23%
- TR: 113.46%
TOTAL RETURN AVERAGE: +64.67%