Jason Mann's Top Picks: Canadian Natural, Sprott Uranium Trust, Copper Mountain BNN Bloomberg MARKET OUTLOOK:
Markets continue to rally, looking through the resurgence of COVID in some countries, backstopped by supportive central banks and ongoing fiscal stimulus from the Biden administration. Earnings have also been stellar, doing their best to catch up to some historically high valuations. Fund flows into equities are very strong, and corporate buybacks have returned in force. Central banks are now dealing with a different problem: inflation. While some of the problems are supply chain related, the reality is that demand for products and labour is far outstripping supply. We think resurgent COVID won’t slow re-openings much, particularly in large economies like the U.S., which continue to take a “plough forward” approach overall. The other reality is that case counts are the less important measure than hospitalizations. That, coupled with fiscal stimulus, is leading to a “transitory for longer” environment for inflation. So much so, in our view, that the real risk currently is “stagflation” where inflation increases as growth slows from its peak. In a stagflation environment, you want a barbell approach of stocks that benefit directly from inflation: commodities and related businesses, as well as high-quality, larger-cap, low volatility stocks with strong earnings growth (as opposed to speculative top-line growth). High-priced growth stocks are at great risk in this environment, as the last month has shown, with many former high-flying tech stocks off 50 per cent or more from their peaks. It’s a long way down from “growth” to “value”. That has us maintaining weights to high-quality cyclicals in materials (lumber, copper, steel), as well as related construction and transportation businesses, and then exposure to larger financial and technology businesses. We’re avoiding or are net short expensive growth stocks and more defensive sectors like utilities.
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