Darren Sissons' Top Picks: October 27, 2021
BNN Bloomberg
Top picks from Darren Sissons, vice-president and partner, Campbell, Lee & Ross
MARKET OUTLOOK:
The peak annual volatility season of September through October is almost finished. Markets should stabilize through year end. The key challenges for higher market levels are rising interest rates and our strong petro-currency. While consensus calls for between two and eight interest rate hikes through 2023, we lean more towards modestly higher interest rates. The strong Canadian dollar will dampen export demand thereby dragging on economic performance.
Equally so, given 51 per cent of mortgages are now variable, substantially higher interest rates would slow economic performance as home owners increasingly divert a higher portion of their income to interest payments. Relative performance is the third consideration. Two central banks, Norway and New Zealand, raised interest rates in 2021. More will follow by 2023. Global fund flows, triggered by rising rates will then also impact interest rates in Canada.
Inflation remains a substantial and highly politicized risk. While central bankers are publicly stating inflationary pressure is temporary, their agency conflict is hard to ignore. Should they admit their large scale money printing caused inflation, they lose credibility. However, failure to contain the obvious inflation we are all experiencing will create further problems.
Carbon energy has been a clear winner in 2021. That is unsurprising as the Russian – Saudi excessive production commitments in March 2020 to counter U.S. shale was the initial Black Swan catalyst of the March 2020 sell-off. Energy names have rallied substantially since the deep March 2020 declines. Oil companies likely move still higher as ill-timed, widespread roll-out of anti-oil ESG policies severely curtailed supply making oil companies unable to respond to rising demand.
Looking forward, Canadians should actively take advantage of the strong Canadian dollar. Asian, European and U.S. companies are all on sale in relative terms. Europe for example trades at a steep 10 per cent currency discount versus its normalized trading range. Adding investments in high quality global best-of-breed corporations from foreign jurisdiction now will lock in mean revision gains in the future. Additionally, should oil rally higher, the Canadian dollar will strength further thereby making foreign equities increasingly attractive.
