John Zechner's Top Picks: Martinrea, B2Gold, Crescent Point Energy BNN Bloomberg MARKET OUTLOOK:
Stocks continue to be supported by record low interest rates, fiscal spending, surging profits and a global economy recovering from the pandemic. However, the massive liquidity and a flood of new retail investors has fueled a level of speculation unlike anything since the late 1990s and should raise warning flags for all investors. Valuations are at record levels for those companies with actual earnings and even higher for many ‘growth’ companies that are pre-earnings; valuations of Rivian and Lucid make Tesla look like a deep value, blue chip stock! When speculative fever lessens, these stocks can have significant downside; just look at 50+ per cent drops in names like Zoom, Peleton, Beyond Meat or the entire Canadian pot sector after the excitement wears off and earnings need to be delivered. Momentum strong going into year-end but the setup is reminiscent of 2017 when a year-long, uninterrupted rise in prices gave way to two sharp corrections in 2018 as interest rates began to rise. However, we are early in the new economic cycle and believe that the supply chain issues that are hurting some earnings in the short term may actually end up extending the economic cycle, since this is not a demand issue. Also, given the massive rise in global debt, we don’t see central banks doing anything more than normalizing interest rates despite short-term inflationary pressures. Given that alternatives to stocks remain unattractive, our strategy is to stick with stocks but continue to rotate to those groups that have valuation support, high dividend yields and leverage to a slower growth economy. Industrials, autos, financials, telecom and energy infrastructure all fit that criteria. We also believe gold should do better in this environment; massively negative real interest rates, rising inflation and gold stock valuations at multi-decade lows provide a good risk-reward setup for the group, despite continued money flows into the crypto world as an alternative.
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