Ryan Bushell, president of Newhaven Asset Management
Focus: Canadian dividend stocks

MARKET OUTLOOK

September is usually a volatile month for equities and this year hasn’t been an exception. What is surprising is that the volatility, especially in Canada, has been to the upside. The TSX is up more than 2.5 per cent so far this month, marking new all-time highs for the best-performing index in the world so far this year. 10-year benchmark bond yields in both Canada and the U.S. bounced dramatically off the lows by approximately 0.4 per cent each, an increase in yield of about 33 per cent, which is positive for sentiment surrounding financial shares. Additionally, a shift to value equities in the first two weeks of the month was already benefitting energy shares prior to the significant move in oil prices this week stemming from the attack on Saudi oil infrastructure. Once you tack on the move we have seen in gold stocks over the past few months, we have the big three TSX sectors all heading in a positive direction for the first time in quite a while.

The question is obviously will it last? Financial shares will be tied to the overall health of the economy as evidenced by bond yields, however at today’s below-average valuation levels, I believe there’s still room for significant appreciation, especially if a trade deal was consummated and had the effect of steepening the yield curve. On oil, I do not think the Saudi attack was a one-off, that Saudi can afford to allow it go unpunished or that Iran and its proxy groups will back down. Additionally, Canadian energy valuations are so compressed I think there’s still significant appreciation potential, though capturing the imagination of foreign investors has proved very difficult in the past few years. Another underrated aspect of the events in the Middle East is that it could help our oil egress issues if governments are forced to consider energy security seriously. I don’t really have a view on gold, other than to say that it’s very hard to predict and the companies have historically been terrible stewards of investor capital.

In summary, I think the TSX can continue to perform well through the end of the year and beyond. The biggest risk I see for the broader markets is U.S. technology valuations heading into an election where there shockingly seems to be bipartisan support for limiting the FAANGs on antitrust grounds. There’s exuberance in the marketplace for technology and other share offerings recently with negative earnings. Interestingly the percentage of IPOs last year with negative earnings hit the highest level since 1999. I think the WeWork IPO story is a fascinating example of the sector’s global importance and of how the ripple effects could be far reaching from a U.S. technology valuation reset, similar to how the U.S. housing crisis in 2008 compounded the European banking industry’s problems in the next decade. I remain defensively positioned for my clients, owning primarily infrastructure=based businesses with predictable cash flows and increasing dividends, and I have maintained a 10-per-cent weighting in Canadian oil and gas producers, which are finally seeing their worth resurface.

TOP PICKS

CANADIAN NATURAL RESOURCES (CNQ:CT)
Most recently purchased at $33.

I think the Saudi attack has shifted the paradigm though which energy security will be viewed and Canadian Natural stands to significantly benefit from both higher average energy prices and/or valuations as well as a more conducive pipeline approval/construction landscape should one or both occur.

PEMBINA (PPL:CT)
Most recently purchased at $49.

Pembina recently acquired assets from Kinder Morgan Canada and again increased the dividend to yield just over 5 per cent at current levels. Going forward, the company has a robust organic growth profile and they have been disciplined and successful consolidators. It’s a hard company to recommend given the share price rarely falters, but my clients have been served well by averaging into and owning the shares over the long term.

WPT INDUSTRIAL REIT (WIR/U:CT)
Most recently purchased at $13.50

For my clients, WPT represents a private equity type of investment that diversifies us outside of Canada and into the e-commerce/logistics last mile business. With a nearly 6 per cent yield and a market cap approaching $1 billion, I expect this will be a steady performer over a number of years.

PAST PICKS: SEP. 26, 2018

CANADIAN NATURAL RESOURCES (CNQ:CT)

• Then: $42.88
• Now: $35.95
• Return: -16%
• Total return: -13%

ALTAGAS (ALA:CT)

• Then: $20.73
• Now: $19.75
• Return: -5%
• Total return: 1%

BROOKFIELD INFRASTRUCTURE PARTNERS (BIP-U:CT)

• Then: $51.61
• Now: $63.08
• Return: 22%
• Total return: 28%

Total return average: 5%

WEBSITE: Newhavenam.com