Darren Sissons, vice-president and partner at Campbell, Lee & Ross

FOCUS: Global and technology stocks

MARKET OUTLOOK:

It definitely was an odd twelve months. Half the world remains at home unemployed or working from home and yet across the globe residential real estate and stock markets are at all time highs. Vaccines are being deployed but it will be a while until a large population is COVID resistant. Now, with that backdrop in mind it’s time for a cold hard reflection on 2020 as in many cases reality is somewhat distorted. While anxiety was high, especially during the first quarter of 2021 (“Q1-20”) did the high volume of trading actually add value is the key consideration. During 2020 we saw large volumes of capital move into COVID highflyers. Many of these same high growth names are decaying so gains are declining or losses are appearing. Some of these trades, as in the case of Zoom Video, have actually been net destroyers of wealth recently. A further consideration is did the capital losses triggered in Q1-20 to fund new investments coupled with the taxes now being triggered in decaying growth names add value overall? A full analysis of portfolio returns should include capital gains and losses (over two years if necessary) and income generated. While optically, 2020 appears to have been a strong catalyst for higher portfolio growth a deeper, more in depth analysis may in fact show otherwise. Equally so, while some trading was required perhaps the better strategy was to invest for the long term in temporarily COVID dented quality that has subsequently recovered and will remain a structural growth story into the future.  

Looking into 2021 and beyond investment thematics are now a major consideration given the changing macroeconomic landscape. Investors should have some exposure to COVID recovery trades as this exposure will drive significant portfolio gains. Balancing that exposure against a high quality portfolio of structural growth investments is likely a winning strategy longer term. Areas of concern are fixed income given the extremely low yields and exposure to sectors with abnormally high valuations. Risk management remains a key consideration.

Looking forward, areas we like include healthcare, renewables, the U.K. now Brexit is effectively concluded and selective emerging markets. Technology will continue to provide upside but a near term correction is probable. The jury is still out on the rotation into value and Growth at a Reasonable Price (aka GARP). Should that rotation continue high dividend yielding blue chips will outperform as will moderately priced growth.

TOP PICKS:

CN Rail (CNR TSX)

A sequential dividend growing that largely operates as a tax on Canadian and U.S. GDP. A natural COVID recovery beneficiary as its integrated North American transportation network will help alleviate major bottlenecks in a variety of industries. The company also periodically monetizes real estate parcels for apparently “one-time” non-recurring gains, which belies the underlying reality of a heavily repeated, monetization of inexpensive non-core real estate. The bid for Kansas City Southern is a nice to have but more likely it merely drives the price up for CP Rail. Excellent operating leverage as despite modest revenue growth the dividend has grown at 13 per cent per annum over five years.            

Royal Dutch Shell (RDS/B NYSE)

An attractive 3.5 per cent dividend. It’s positioned for a sizable stake in the coming renewables market via significant investments in hydrogen and investment plans covering a range of alternatives. Is a natural COVID recovery trade as return to office and normalized social interactions will drive substantially higher carbon consumption. Versus prior trading history it trades at a deep discount thereby offering an attractive entry level.

Tencent Holdings (700 HKG)

Tencent is a China-based gaming and social media company. It trades at a relative emerging market discount to its North American FANG peers despite offering a superior growth trajectory. It’s venture portfolio incubates a high growth stable of companies and positions it for entry into adjacent markets. Currently, the portfolio includes meaningful stakes in JD.com, Pinduoduo, Sea, Meituan and several others. The Hong Kong listing and the absence of a major U.S. exchange listing removes the possibility of a negative investment impact due to U.S. - China political tensions. Revenue, net income and the dividend have grown in CAD at an average annual rate of 35 per cent, 33 per cent and 24 per cent over the last five years.

PAST PICKS: April 20, 2020

Corning Inc. (GLW NYSE)

• Then: $20.44
• Now: $45.85
• Return: 124%
• Total Return: 131%

Kone OYJ (KNEBV HEL)

• Then: $54.64
• Now: $72.36
• Return: 32%
• Total Return: 37%

Walt Disney (DIS NYSE)

• Then: $102.26
• Now: $182.72
• Return: 79%
• Total Return: 79%

Total Return Average: 82%

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Blog: http://www.clrim.com/site/financial-investment-news