Veronika Hirsch, portfolio manager at Arrow Capital Management

Focus: Canadian equities and alternative investing
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MARKET OUTLOOK
Recent economic strength has finally allowed central banks around the world to contemplate tightening fiscal policy. Unlike past cycles, which culminated in inflationary pressures, the aftermath of the financial crisis has required an unprecedented amount of stimulus without ever producing the desired robust economic recovery. Consequently, the present process of unwinding a series of emergency measures merely represents an attempt to normalize extremely depressed interest rates, which are in peril of causing long-term distortions to the financial system if maintained for a protracted period. This process will require a careful balancing act in order to avoid derailing the recovery entirely. Traditionally, the onset of tightening would cause a massive rotation by investors into late-stage economically-sensitive sectors. The unorthodox nature of the current cycle has made sector selection unusually challenging. It is not clear whether investors will differentiate between current interest rate normalization and traditional tightening necessitated by overheated economic conditions and rising inflation. One possible outcome could be a volatile macro-based trading phase with sector rotation between late-stage cyclical stocks driven by the tighter conditions, and growth stocks driven by rising earnings. The successful portfolio might need to select stocks from both the cyclical and growth sectors and navigate between them.

TOP PICKS

COMPUTER MODELLING GROUP (CMG.TO)      
This Reservoir Simulation Software Company helps energy companies improve their oil or gas recovery. Recent alliance between HIS Markit and Baker Hughes (BHI) should allow CMG to improve its global reach. There is a possibility BHI could be interested in taking over CMG sometime in the future and thus fill a gap in its product suite. With uncertain fundamentals facing the energy industry, I am picking a company whose revenues are relatively resilient over the cycle. For investors who like getting paid to wait, CMG sports an attractive 4.1 per cent yield.                                                                                                                

BROOKFIELD INFRASTRUCTURE PARTNERS (BIP_u.TO)
Governments around the world have embarked on infrastructure spending in an attempt to stimulate domestic economic growth. Because of budgetary constraints, governments might need to monetize existing projects to help finance future programs. This will increase the pool of quality assets available for acquisition. Management has done an excellent job making acquisitions in countries facing political or economic hardship, and monetizing mature projects when conditions are optimal. BIP has an experienced management team with global expertise, a 4.6 per cent dividend yield and a growing portfolio of valuable infrastructure assets.

DESCARTES SYSTEMS (DSG.TO)
DSG provides cloud-based inter-enterprise logistics management software primarily for the transportation industry. The company has been growing both organically and through reasonably priced tuck-in acquisitions. Management is appreciated for its frugal cost management and successful strategy of broadening its suite of services by making strategic acquisitions — with an excellent track-record of integrating them quickly into the operations. DSG should continue to benefit from the rapid growth of e-commerce.
 

PAST PICKS: JULY 20, 2016

A&W REVENUE ROYALTIES INCOME FUND (AW_u.TO)

• Then: $33.65
• Now: $32.20
• Return: -4.30%
• TR: -0.09%

MDA CORP. (MDA.TO)

• Then: $84.49
• Now: $66.00
• Return: -21.88%
• TR: -20.20%

ISHARES S&P/TSX GLOBAL GOLD INDEX FUND ETF (XGD.TO)

• Then: $15.74
• Now: $11.93
• Return: -24.20%
• TR: -24.10%

TOTAL RETURN AVERAGE: -14.79%