Chris Blumas, portfolio manager, Raymond James Investment Counsel 

FOCUS: North American large caps

MARKET OUTLOOK:

Monetary policy will continue to play a pivotal role in shaping the global 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. Going forward, a repeating pattern of easing and tightening may be the new norm for major central banks.

While monthly inflation continues to remain “stubbornly high” in the United States because of structural changes in the economy, higher interest rates are dampening consumer activity and reducing business investment. In this environment, each piece of economic information is being heavily scrutinized by traders and is having an outsized impact of financial markets. Looking ahead, it appears unlikely that the U.S. Federal Reserve’s two per cent inflation target will be reached over the next few quarters, and this pushes out the possibility of future interest rate cuts.

The modern economy is addicted to credit and dependent on liquidity. Between mid-2008 and early 2022, the total assets of the five largest central banks increased by more than US$25 trillion, or by almost five times. Higher interest rates and further central bank tightening create headwinds for asset prices and these two forces are likely to have a negative impact on economic growth over the short term.

While the likelihood and severity of a potential recession remain unclear, I think investors should avoid the temptation to exit the markets and wait on the sidelines. History has shown that the single biggest mistake an investor can make is to capitulate and exit the markets at the wrong time. In reality, this can be one of the best times to buy and in the words of legendary investor Warren Buffett, “be fearful when others are greedy and be greedy when others are fearful.”

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TOP PICKS:

Alimentation Couche-Tard (ATD TSX)

Most recent purchase at $68.99 on Sept. 29

Couche-Tard is a Canada-based convenience store operator with a global presence. The company has a coast-to-coast presence across North America and leading market share across several markets in Europe. In its most recent fiscal year, Couche-Tard generated around two-thirds of its revenues and gross profit in the United States. The company recently completed a global rebranding initiative under the Circle K banner and is well positioned to continue consolidating a fragmented industry. While there are a few notable pressures facing the industry, including rising labour costs and the structural decline of cigarette sales, Couche-Tard can offset some of these pressures with its scale and purchasing power. The shares currently trade around 16-times forward earnings and have a dividend yield of less than one per cent.

Enbridge (ENB TSX)

Most recent purchase at $46.16 on Sept. 12

Enbridge is a North America-focused energy infrastructure company with a lower risk business model. The company has low commodity price exposure, strong contracts and low counterparty credit risk. Enbridge recently announced a deal to acquire three U.S. gas utilities from Dominion Energy in an all-cash transaction that is expected to close next year. This transaction will help the company grow its earnings and cash flows and further enhance asset diversification. The shares currently trade around eight-times distributable cash flow and have a dividend yield of almost eight per cent with a cash flow payout ratio of around 65 per cent.

Walt Disney (DIS NYSE)

Most recent purchase at $80.35 on Sept. 28

Disney is a global media and entertainment company. The company generates revenues by distributing original content, providing customer experiences at its parks and resorts and by selling consumer products. It’s been a rough few years for Disney shareholders with the share price trading at less than 45 per cent of the five-year high achieved in March 2021. Bob Iger, the newly returned CEO, is under intense pressure to reshape the company and improve profitability. During its most recent quarter, Disney delivered solid results as streaming losses continued to shrink, but direct-to-consumer subscriber growth was weak. On the positive side, the company’s Parks and Experiences business continued to perform well with revenues and operating profits up by 13 per cent and 11 per cent respectively year-over-year. Going forward, while it’s going to take Disney+ another year to become profitable, the company’s unique assets and digital capabilities strengthen its competitive position and create a platform that should help to drive future EPS growth. The shares currently trade around 18-times forward earnings and a 30 to 40 per cent discount to a conservative sum-of-the-parts valuation.