Darren Sissons, partner and portfolio manager, Campbell, Lee & Ross

FOCUS: Global and technology stocks 

MARKET OUTLOOK:

 Surprisingly, 2023 has been a strong performance year with many mandates now at or through all-time highs. Unfortunately, the markets are now at a critical inflection point. Central banks must choose between increasing the cost of capital to tame inflation, or kicking the can down the road and ignoring or minimizing inflation considerations near-term. The rate of interest rate change and the increasing cost of capital were direct drivers of four major systemic failures in the last 12 months. Those include the U.K. pension crisis and the failure of two U.S. banks, followed by the forced acquisition of Credit Suisse by UBS. Each of those events carried the impetus of a major market sell-off.  However, for each failure, regulators and central banks coordinated efforts to remove risk and smooth worried markets.

Unfortunately for regulators, inflation remains untamed and well above the two per cent target. The U.S. Federal Reserve is expected to raise rates by 0.25 per cent in May. After that, consensus assumes a pause in additional rate increases and a reduction in interest rates in the fourth quarter of 2023 to counter a recession. In essence, central banks are betting the farm on the assumption rate increases so far are sufficient to tame inflation. Should that assumption prove wrong, further rate increases should be expected.  

Given the above dynamic, it is unsurprising that defensive sectors (staples and pharmaceuticals) have rallied this year, while high growth and technology names have largely fallen. Also unsurprising is the rally in quality, best-of-breed names and sectors that cater to wealthier portions of the population. 

Investors continue to operate in a tactical market, which requires active management. A well-managed buy-and-hold portfolio methodology is a proven value-creating strategy longer term. However, that strategy is not optimal during periods of heightened systemic risk and sustained market volatility. A better approach is a modified buy-and-hold strategy that includes some opportunistic trading when appropriate.

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TOP PICKS:

Accenture (ACN NYSE)

Accenture is a best-of-breed IT service and consulting house with an offering covering communications, media and technology, financial services, health and public service, products, and resources. The shareholder algorithm is an annual dividend increase coupled with a buyback. Its products and services are effectively a tax on fortune 2,000 companies as they seek to lower costs and increase efficiencies through IT spending. Accenture has generated an annualized five and 10-year average growth rate in Canadian dollars of 15.7 per cent and 19.1 per cent, respectively. The correction in technology-related companies has provided an attractive entry level for new investors.

Samsung Electronics (SMSN LON)

Samsung Electronics is one of only two semiconductor fabrication companies capable of manufacturing the highest technology chips. Additionally, given Sino aggression towards Taiwan, the home of TSMC, the other leading-edge chip fabrication vendor, Samsung is a direct beneficiary of recurring Chinese aggression. The best time to buy chip companies is at or near the semiconductor cycle bottom. Samsung reported its worst quarter in eight years on Jan. 6, 2023. It is positioned for continued market share leadership through aggressive capital expenditures and research and development budgets. A diversified tech behemoth with exposure to cellphones, consumer electronics and semiconductor fabrication. Owning Samsung throughout the business cycle is sensible as its annualized Canadian dollar total return for the last decade averaged 12 per cent.

Toronto-Dominion Bank (TD TSX)

TD underperformed peers recently due to its 10 per cent exposure to Charles Schwab Corp and its pending acquisition of First Horizons Bank (FHN). However, that weakness appears overdone given recent Charles Schwab earnings results and the generally resilient results generated by quality regional banks. Forward-looking catalysts include a potential re-calibration of the FHN acquisition price, continued gains for rising net interest margin and should a pause in interest rate hikes occur then credit losses will be lower than expected. Given the broad sell-off in banking names and the bank’s lagging performance, TD is priced at attractive entry levels. TD’s pedigree is well-known to Canadian investors. It has generated an 11.8 per cent average annualized return over the last decade.     

PAST PICKS: April 18, 2022

Bank of America (BAC NYSE)

• Then: $38.85
• Now: $29.21
• Return: -25%
• Total Return: -23%

Novartis AG (NOVN SWX)

• Then: 83.37 CHF
• Now: 90.95 CHF
• Return: 4%
• Total Return: 9%

Saputo (SAP TSX)

• Then: $30.30
• Now: $34.94
• Return: 15%
• Total Return: 18%

Total Return Average: 1%