Christine Poole, chief executive officer and managing director, GlobeInvest Capital Management

FOCUS: North American large-cap stocks 

MARKET OUTLOOK:

A resilient labour market combined with an uptick in inflation, which remains well above the target range, convinced the Bank of Canada that monetary policy was not sufficiently restrictive and resurrected the hiking cycle last week. The Bank of Canada is concerned that “excess demand in the economy looks to be more persistent than anticipated” and that the inflation rate in April rose for the first time in 10 months. The need for further policy rate increases will be dependent on incoming economic data.

Similarly, data prints over the past month in the U.S. reveal a growing economy not yet on the brink of recession. The tight labour market continues to buoy real incomes and fuel spending, particularly in services. That said, the tailwinds bolstering consumer spending capacity may be fizzling out as the stockpile of excess savings accumulated during the pandemic erodes and banks tighten lending standards for consumer credit. Household expenditures are a major driver of economic growth since consumer spending accounts for about 70 per cent of U.S. gross domestic product.

The bifurcation of the U.S. economy between manufacturing and services activity is narrowing. The ISM manufacturing index, which measures economic activity in the manufacturing sector, has contracted for the past seven consecutive months. In contrast, the ISM services index has expanded over the same period, albeit the level of activity within the service sector is slowing with the May reading now just barely above the expansion level. 

So far, higher interest rates have not slowed the economy to the point where dampened demand has led to significantly weaker prices. Central banks are steadfast to bring inflation sustainably to the two per cent target. Additional policy tightening and the ongoing effects of earlier increases suggest an economic slowdown is unavoidable, whilst the degree remains uncertain.

For risk-averse investors, fixed-income investments now offer a real rate of return. For equity investors, short-term market dislocations represent opportunities to invest in quality income and growth companies for long-term appreciation.

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TOP PICKS:

Fortis (FTS TSX)

Recent purchase $57.40 range in June 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 between four and six per cent through 2027. Fortis offers a yield of four per cent.

Thermo Fisher Scientific (TMO NYSE)

Recent purchase $519.50 range in June 2023

TMO is a leading global provider of products and services to pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions and government agencies as well as companies operating in food safety and process control settings. TMO supplies the “picks-and-shovels” or tools to healthcare companies which are needed to develop and manufacture drugs and vaccines and diagnose illnesses/diseases. In addition to organic growth opportunities, TMO has a proven record of making accretive acquisitions and applying its continuous improvement process to enhance financial performance. TMO offers a dividend yield of 0.3 per cent.

Zoetis (ZTS NYSE)

Recent purchase price $164 range in June 2023

Zoetis is a global leader in the animal health industry offering therapeutics for companion animals and livestock. Operations outside of the U.S. account for 46 per cent of revenues, including 21 per cent in emerging markets. The company has a diverse, durable, and innovative portfolio with about 300 product lines across eight animal species and within seven major product categories. Zoetis provides a dividend yield of 0.9 per cent.

PAST PICKS: June 14, 2022

Alphabet (GOOGL NASD)

• Then: US$2,134.3
• Now: US$124.69 (After 20-for-1 stock split on July 18, 2022)
• Return: 17%
• Total Return: 17%

Mondelez (MDLZ NASD)

• Then: US$58.47
• Now: US$72.76
• Return: 24%
• Total Return: 27%

Royal Bank of Canada (RY TSX)

• Then: $126.01
• Now: $124.65
• Return: -1%
• Total Return: 3%

Total Return Average: 16%