Chris Blumas, portfolio manager, Raymond James Investment Counsel

FOCUS: North American large caps 

MARKET OUTLOOK:

The global economy is expected to face a series of opportunities and challenges over the next year. Overall, the outlook appears cautiously optimistic, although there are several factors that could potentially impact economic growth and stability.

One of the primary drivers of the global economy has been the ongoing recovery from the pandemic. Many developed countries have experienced a resurgence in consumer spending, business investment, and international trade. However, the pace of recovery has varied across regions, with emerging markets facing more significant challenges.

Monetary policy will continue to play a vital role in shaping the economic landscape. Concerns about inflation have prompted central banks around the world to tighten monetary conditions. However, the pace of tightening has varied among central banks as striking the right balance between supporting growth and managing inflation has proven challenging.

While monthly inflation continues to roll down in the U.S., it appears unlikely that the U.S. Federal Reserve’s two per cent inflation target will be reached this year and this fact does not support an interest rate cut before the end of this year.

The modern economy is addicted to credit and higher interest rates hurt governments, businesses, and consumers. Higher rates have forced these participants to slow their borrowing and the recent turmoil in the U.S. banking sector is likely to force some banks to curtail lending. These two forces are immensely powerful and are likely to have a negative impact on economic growth and increase the odds of a recession in the short term.

While the depth and duration of a potential recession remain uncertain, I think that investors should remain well diversified and defensively positioned and avoid the temptation to exit the markets and wait on the sidelines. There are pockets of value in today’s markets and history has shown that patient investors have been rewarded for controlling their emotions and staying invested. 

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TOP PICKS:

TD Bank (TD TSX)

Most recent purchase at $78.94 on June 8, 2023.

TD is a retail-focused North American bank. Its share price is down around 10 per cent year-to-date and has underperformed its peer group. The bank recently terminated its deal to buy First Horizon (FHN-US), a U.S. regional bank headquartered in Memphis, Tennessee, because it was unable to secure regulatory approval. The collapse of this deal has spooked investors and left TD trading at a rare discount relative to its peers. Going forward, TD has the largest capital buffer among its peers and the option to direct any excess capital toward a number of shareholder-friendly actions. TD shares currently trade around nine times forward earnings and have a dividend yield of almost five per cent.

Raytheon Technologies (RTX NYSE)

Most recent purchase at $96.53 on May 19, 2023

Raytheon is an aerospace and defence company with a global presence. The company was created a few years back with the combination of United Technologies’ aerospace business and legacy Raytheon. The combined company has a unique business model because of the relative balance between the aerospace and defence businesses. Overall, this gives Raytheon greater cash flow stability and the ability to operate in a more counter-cyclical manner. The company also has a strong management team and is very shareholder friendly. Going forward, the two main drivers of growth in future profits are the structural cost reductions associated with the merger and the continued recovery within the commercial aerospace sector. The shares currently trade around 17 times forward earnings and have a dividend yield of 2.4 per cent.

Brookfield Corporation (BN TSX)

Most recent purchase at $42.29 on June 8, 2023

Brookfield Corporation is a direct investor and third-party asset management firm with a unique focus on real assets and private equity. The company has a controlling interest in each of its publicly traded affiliates and a portfolio of other private investments. Brookfield is one of a handful of global private equity players that are uniquely positioned to raise large amounts of capital from institutional clients as they shift more of their portfolios toward higher-yielding asset classes. While the company has four publicly listed operating subsidiaries (BAM, BBU, BEP, and BIP), the parent company has the unique ability to allocate capital across its platform and operate in a counter-cyclical manner. Currently, Brookfield has more than $110 billion in group liquidity available to deploy across its platform and is uniquely positioned to benefit from weakness in the global macroeconomic environment. The shares currently trade at less than 10 times distributable earnings and have a core free cash flow yield of more than eight per cent.