David Driscoll, President & CEO, Liberty International Investment Management
FOCUS: Global stocks
Top Picks: Brookfield, CME Group, Novo Nordisk
MARKET OUTLOOK:
It’s important for equity investors to pay attention to the bond markets because equity valuations are based on the present value of future cash flows. When interest rates rise, the discount rate rises and, therefore, those present value cash flows fall.
Currently, the bond market is concerned about rising government deficits and inflation on both sides of the border. On average, professional bond investors are not going out any further than three-year maturities because the risk isn’t worth the reward of owning longer-dated bonds.
How does this impact equity investors? I’ll answer that with one question: “Where were you in 2022?” Just two years ago, interest rates rose 4.75 per cent, the highest one-year increase since 1982, and the equity returns ranged from down eight per cent for the TSX (Canada) to down 33 per cent for the Nasdaq (U.S. tech stocks). The Magnificent Seven mega-cap tech names were down an average of 46 per cent.
Returns for the S&P 500 are higher than its peers in 2024 because 30 per cent of the index is tech-based and most of the return has come from just 10 companies. That’s a reason to be cautious.
The lessons to be learned here are:
When interest rates rise, equity markets often correct.
Tech stocks are twice as risky as the overall stock market. If you double your money, sell half to ensure you don’t get caught in a downdraft if this current bubble bursts.
The current risk to artificial intelligence (AI) is quantum computing which may be 5-10 years away. Quantum computing chips calculate millions of times faster than AI which could end the domination of AI stocks.
Only 10 per cent of semi-conductor chips are located in the United States. If China invades Taiwan, where will U.S. AI firms get their chips from?
Companies that are serial acquirers – whereby they allocate capital to private acquisitions and their dividends grow at a higher-than-average rate – are the true winners in the long-run, with half the risk of tech stocks.
When emotions run high, investment mistakes are made.
Always remember this axiom: “Bulls make money, bears make money, and pigs get slaughtered.” Don’t be a pig.
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TOP PICKS:
BROOKFIELD (BN TSX)
Brookfield invests in long-life, high-quality assets and businesses. It also focuses on real estate, infrastructure and renewable power sectors worldwide. If 2025 becomes the year of M&A deals, Brookfield will be in the middle of it all. It’s also a way to access private equity and private credit without investing in a fund which would be riskier and with higher fees.
CME GROUP (CME NASD)
CME Group operates a derivatives exchange that trades futures and options contracts including interest rates, stock indexes, currencies and commodities. Instead of owning commodity stocks, we own CME to offset volatility of commodities and earn a spread on every options or futures contract written from both counterparties. The outcome is double the long-term returns of commodity stocks with one-third the risk. And if 2025 turns out to be chaotic with heightened volatility, CME should be a benefactor. Finally, the cash flows are so strong that if there’s money left over after their capex is invested, they have a history of paying out a special dividend on top of an annual growing dividend.
NOVO NORDISK (NOVO.B CPH)
Novo Nordisk is a pharmaceutical firm that specializes in diabetes care and weight loss. The stock is down 51 per cent from its June peak. While competitor Eli Lilly has 60 per cent of revenues within the United States, Novo Nordisk has 60 per cent of its revenues around the world. Recent studies from the next generation of GLP-1 formulas (CagriSema) fell short of expected weight-loss (22 per cent compared to an expected 25 per cent) and the stock cratered. It now trades at just 16 times 2026 earnings, the cheapest it’s been in a decade.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BN TSX | Y | Y | Y |
| CME NASD | Y | Y | Y |
| NOVO.B CPH | Y | Y | Y |
PAST PICKS: DECEMBER 19, 2023
Cogeco Communications (CCA TSX)
- Then: $55.77
- Now: $67.10
- Return: 20%
- Total Return: 27%
Atrion (ATRI NASD)
- Then: US$350.53
- Now: US$459.92
- Return: 31%
- Total Return: 32%
Jardine Matheson Holdings (J36 Singapore)
- Then: S$39.78
- Now: S$41.43
- Return: 4%
- Total Return: 10%
Total Return Average: 23%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CCA TSX | Y | Y | Y |
| ATRI NASD | Y | Y | Y |
| J36 SGX | Y | Y | Y |