Lorne Steinberg, president, Lorne Steinberg Wealth Management

FOCUS: Global value stocks and high yield bonds

MARKET OUTLOOK:

It appears that central banks are gradually winning their war against inflation. The consumer price index is rising at a much slower rate than last year, albeit still well above the desired two per cent level. At the same time, these higher yields are starting to impact consumer spending, which has been decelerating over the past few months. As consumers are pinched by higher mortgage and car payments, discretionary spending is returning to pre-pandemic levels.

All of this implies a slowdown in economic activity and some slack in the labour market, which should give the U.S. Federal Reserve and the Bank of Canada an opportunity to maintain interest rates at current levels.

At present, the steep rise in bond yields is putting pressure on equities, as investors can once again earn a decent return on fixed income. However, as the economy cools, the rate of inflation should continue to subside, giving central banks the opportunity to lower interest rates, at least somewhat, in 2024. This should provide a positive backdrop for equities going forward.

Also of note is that the underperformance of Canadian equities over the past decade provides investors the opportunity to buy the “best of Canada” at cheap prices with high dividend yields.

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TOP PICKS:

CIBC (CM TSX)

CIBC is Canada’s fifth-largest bank with assets of just under $1 trillion. Over the past several years it has delivered industry-leading revenue growth alongside impressive cost control. Despite generating comparable returns to its peers, CIBC has historically traded at a fairly steep discount due to management mishaps in years gone by. At its current valuation, the shares trade at a P/E of nine times and a dividend yield of 6.7 per cent. Despite an expected increase in loan losses over the coming year, the shares offer excellent value.

Kenvue (KVUE NYSE)

Kenvue is the consumer health division of Johnson & Johnson that was recently spun off into a new public company. The company has three divisions: self care, skin care and beauty, and essential health. Some of the company’s top brands include Tylenol, Benadryl, Motrin, Neutrogena, Aveeno, Band-Aid and Johnson’s Baby. Kenvue’s shares have traded lower due to a litigation issue relating to its acetaminophen exposure, but the recent price decline has been overdone, given the potential exposure. The shares offer compelling value for a consumer products company of this quality. The dividend yield is four per cent while revenues are growing faster than its peers.

Kering SA (KER EPA)

Kering is the French luxury fashion house whose major brands include Gucci, Yves Saint Laurent, Balenciaga and the recently acquired Creed. The company has done an excellent job of revitalizing tired brands, while generating significant free cash flow. The company has generated double-digit revenue growth over the past number of years, and its recent purchase of the luxury fragrance brand Creed should drive continued growth and margin improvement going forward. Free cash flow has been used for dividends, share buybacks and acquisitions. The shares have been largely ignored, and at a P/E of 15 with a 3.4 per cent dividend offer substantial upside.