Christine Poole, CEO and managing director, GlobeInvest Capital Management

MARKET OUTLOOK:

Notwithstanding 525 basis points of U.S. Federal Reserve rate hikes since March 2022, the U.S. economy remains resilient, growing at an annualized rate of 2.4 per cent in the second quarter of 2023. Based on economic data released so far following the quarter, the Federal Reserve Bank of Atlanta forecasts real gross domestic product (GDP) in the third quarter to further accelerate.

The rise in the 10-year U.S. Treasury bond yield this month to its highest level since late 2007 appears to be driven by optimism about the economic outlook, which has caused investors to scale back expectations on future rate cuts. The mantra of “higher for longer” is taking hold. Higher bond yields, however, weigh on stock valuations, particularly for growth stocks, which have been the price leaders this year.

Inflation has steadily receded since its peak in June 2022, although it remains above the Fed’s target of two per cent. The central bank remains concerned about the upside risk to inflation, in the face of low unemployment and rising wages. Should inflation reverse its downward path, the latter provides the Fed ammunition to continue raising interest rates.  

In contrast to restrictive monetary policy, fiscal policy has been and remains expansionary. Since the pandemic, fiscal policies announced to support growth include three rounds of pandemic relief cheques to U.S. households, the Infrastructure Investment and Jobs Act, the CHIPS and Science Act and the Inflation Reduction Act. These stimulus plans have supported consumer spending as well as new capital investment plans, counteracting the impact of rising interest rates on the economy.

The much-anticipated recession continues to be delayed, highlighting the difficulty in making accurate macroeconomic forecasts. We remain focused on investing in financially sound companies that can endure and thrive over the whole economic cycle.

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TOP PICKS

Fortis (FTS TSX)

Recent purchase $53.25 range in August 2023

Fortis is a North American electric and gas utility company, generating its cash flow primarily from regulated assets with over half its revenues from the U.S. Fortis is a stable cash flow generator, posting 49 consecutive years of annual dividend increases. Supported by a backlog of low-risk, regulated projects, and cleaner energy initiatives, Fortis has affirmed an average annual dividend growth of four to six per cent through 2027. Fortis offers a yield of 4.2 per cent.

Royal Bank of Canada (RY TSX)

Recent purchase price $123.15 range in August 2023

Royal Bank’s diversified business mix consists of personal & commercial banking (52 per cent of earnings), capital markets (24 per cent), and wealth management and insurance (24 per cent). Geographically, Canada accounts for 59 per cent of revenues, the U.S. 25 per cent and International 16 per cent. The stock provides investors with a current dividend yield of 4.5 per cent.

WSP Global (WSP TSX)

Recent purchase price $187 range in August 2023

WSP Global provides engineering and design services to clients in the earth and environment; transportation and infrastructure; property and buildings; resources, power and energy; and industry. Through strategic acquisitions, WSP has expanded its global presence with Canada representing 17 per cent of revenues as well as Europe, the Middle East, India and Africa 32 per cent, Americas 34 per cent, and Asia Pacific 17 per cent. WSP is committed to its proven growth strategy of being a consolidator within a fragmented industry, continuous margin improvement, and growing organically while maintaining a strong balance sheet. WSP offers a dividend yield of 0.8 per cent.

PAST PICSKS: August 23, 2022

Brookfield Renewable Partners (BEP.UN TSX)

• Then: $50.50
• Now: $35.60
• Return: -30%
• Total Return: -26%

Johnson & Johnson (JNJ NYSE)

• Then: US$166.13
• Now: US$164.67
• Return: -1%
• Total Return: 2%

RTX (RTX NYSE)

• Then: US$92.43
• Now: US$85.08
• Return: -8%
• Total Return: -6%

Total Return Average: -10%