Lyle Stein, Senior Portfolio Manager and Managing Director, Vestcap Investment Management

Focus: Canadian Equities

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MARKET OUTLOOK:

Despite late-quarter Brexit bout of volatility, Q2 2016 showed the sustainability of the Canadian equity market which year-to-date is one of the best-performing major markets in the world. Canadian Materials stocks, led by Golds, continue to perform well coming out of the doom and gloom of the January-February period where it seemed that the market was pricing the entire sector as if all were going bankrupt. Negative interest rates throughout Europe and Japan has also spurred demand for the sector. Having seen extreme pessimism before, we held our Materials positions (pre-Brexit, we added to Golds) and were in a nice position to catch the recovery. 

Looking forward, the storm clouds on the horizon haven't really changed.  While the Brexit vote has come and gone, the consequences for Europe are still being assessed, with the banking sector there now subject to increasing scrutiny.  Mid-quarter, the U.S. Fed changed its hawkish tone, realizing the damage that could be inflicted on the global economy should U.S. interest rates rise too quickly. The futures market is no longer pricing in a US rate hike until at least Q1-2017. Our view is that the tepid global growth that we have experienced since the '08-'09 financial crisis will continue, led by growth in North America.

We continue to be concerned about the abnormally low (or negative) level of interest rates across the world, the longer term consequences of which are now being felt, especially by savers. Driven by central bankers "doing whatever it takes" to spur economic growth, the liquidity being injected into the global financial market is having unintended consequences, fueling bubbles in certain markets, and destroying capital in others. 

At Vestcap, we remain cautious. Our early-in-the-year view that cash is more dear than it has been, remains in place. Our view towards the bond market is that at current interest rates 1 per cent, it offers "rewardless-risk," especially to those who are chasing yield in this low-return environment.  Our preference is yield-paying equities with reasonable prospects for growth, complemented by holdings of Materials stocks where the opportunities for gain still look favourable. 
 

Top Picks:

Equitable Group (EQB.TO) - Underfollowed, "Tiny Bank" Financial

Very attractively priced small cap financial (<$1Bn): trades at under 7x EPS with better-than-big-bank prospective growth. Fintech disruptor. Its EQ Bank platform has exceeded expectations and represents quickly growing deposit base. Well capitalized, EQB has ability to grow its 1.9 per cent yield (10 per cent payout ratio) over time. 

Cineplex (CGX.TO) - Stable "Consumer Experience" Business Model

Canada's largest motion picture exhibitor - growing into premier "out of home" experience provider. Rec Room, eSports. Well-oiled operation, grow revenues away from box office and concessions; grew during downturn. 3 per cent growing dividend yield, well-capitalized free cash generator.

Agnico Eagle Mines (AEM.TO) - Global Insurance Policy

Limited exposure to political risk - Canada, Finland, Mexico. Management team is deep and has very successful record of execution. "Go-to" name in the space.

Past Picks:  November 4, 2015

Husky Energy (HSE.TO)

• Then: $19.05
• Now: $15.71
• Return: -15.76%
• TR: -15.76%

National Bank (NA.TO)

• Then: $43.53
• Now: $44.43
• Return: +2.07%
• TR: +6.05%

HudBay Minerals (HBM.TO)

• Then: $6.63
• Now: $6.24
• Return: -5.88%
• TR: -3.58%

Total Return Average: -4.43%

Twitter: @Vestcap1988

Website: http://www.vestcap.com