Chris Blumas, portfolio manager, Raymond James Investment Counsel 

FOCUS: North American large caps 

MARKET OUTLOOK:

One of the primary drivers of the global economy has been the ongoing recovery from the pandemic. Many developed countries have experienced a resurgence in consumer spending, business investment, and international trade. However, the pace of recovery has varied across regions, with emerging markets facing more significant challenges.

Monetary policy will continue to play a pivotal role in shaping the economic landscape. Concerns about inflation have prompted central banks around the world to tighten monetary conditions. However, the pace of tightening has varied among central banks as striking the right balance between supporting growth and managing inflation has proven challenging.

While monthly inflation continues to roll down in the U.S., it appears unlikely that the U.S. Federal Reserve’s two per cent inflation target will be reached this year and this fact does not support an interest rate cut before the end of this year.

The modern economy is addicted to credit and dependent on liquidity. Between mid-2008 and early 2022, the total assets of the five largest central banks increased by more than $25 trillion or by almost five times. Higher interest rates and further central bank tightening create headwinds for asset prices and these two forces are likely to have a negative impact on economic growth over the short term.

While the likelihood and severity of a potential recession remain unclear, I think that investors should remain well diversified and defensively positioned and avoid the temptation to exit the markets and wait on the sidelines. History has shown that disciplined investors have been rewarded for controlling their emotions and staying invested.

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TOP PICKS:

TD Bank (TD TSX)

Most recent purchase at $84.20 on July 17, 2023

TD is a retail-focused North American bank. Its share price is down around five per cent over the last si months and has underperformed its peer group. The bank recently terminated its deal to buy First Horizon (FHN-US), a U.S. regional bank because it was unable to secure regulatory approval. The collapse of this deal has spooked investors and hurt TD’s reputation. Going forward, TD has the largest capital buffer among its peers and the option to direct any excess capital toward a number of shareholder-friendly actions. TD shares currently trade around 10 times forward earnings and have a dividend yield of 4.3 per cent.

Yum China (YUMC NYSE)

Most recent purchase at $57.53 on Aug. 1, 2023

Yum China is the largest restaurant operator in China. The company generates revenues through company-owned restaurants and from franchise fees. Yum China’s most well-known brands are KFC, Taco Bell, and Pizza Hut but its restaurant portfolio also includes several other well-known local brands and concepts. While some near-term headwinds associated with macroeconomic conditions persist, the company’s resilient business model, proven management team, and strong digital capabilities should allow it to continue growing sales and profits at an above-average rate. The company has an exceptionally strong balance sheet (net cash of almost $3 billion or $7 per share) and a loyalty program with over 400 million members. The shares currently trade at around 19.5 times adjusted forward earnings and have a free cash flow yield of five per cent.

CGI Inc. (GIB.A TSX)

Most recent purchase at $128.90 on July 26, 2023

CGI is an IT outsourcing and consulting company and its revenues are split almost evenly between these service offerings. The company has clients around the world and a strong competitive position in North America and Europe. As companies look to boost efficiency and transition to a more digital world, CGI’s service offerings and global delivery model lead to enduring client relationships and a high level of recurring revenues. Going forward, the CGI is well positioned to benefit from trends in digitization and has the financial flexibility to create value through acquisitions, organic initiatives, and share buybacks. The shares are currently trading around 17.5 times forward earnings and have a trailing free cash flow yield of 5.7 per cent. CGI does not pay a dividend to shareholders.