This past year brought welcome relief to money managers who had endured a distinctly awful 2022, when nearly every investment under the sun got burned.
While 2023 was choppy overall, stocks and bonds have mounted a powerful year-end rally. Victory signs are emerging in the fight against inflation, even as major developed economies avoid descending into a deep downturn.
This was not what many had envisioned for 2023. A recession had seemed almost inescapable owing to one of the fastest central bank tightening cycles in history, with the inverted yield curve – when short-term bonds offer bigger yields than longer-term ones – sending a clear and ominous warning. With this as the backdrop heading into the year, many money managers were advocating for defensive positioning in things like sturdy dividend stocks and recession-resistant consumer staples.
Yet, what transpired was a year of magnificent returns from the high-growth and pricey U.S. tech giants, and by year-end, even riskier small-caps were shining. Bonds gyrated through the year, but were in a clear upswing by the end, bolstered by their capital gains potential as central bankers provided strong hints interest rate cuts were nearing. Balanced portfolios that consist of both equities and fixed income, much maligned just 12 months ago after a year in which nothing worked, are finding admirers again.
The S&P 500, including dividends, has returned nearly 25 per cent this year. That’s more than double the 11-per-cent total returns from the S&P/TSX Composite Index, which is tech-light but full of defensive dividend payers.
A year ago, nine Canadian fund managers bravely broke out their 2023 crystal balls for us. We thought we’d check back in to see how their recommendations fared – and what their best advice and top picks are for the year ahead.
Denis Taillefer, senior portfolio manager, Caldwell Investment Management
Last year’s pick: Boston Scientific Corp. (BSX-N)
Year-to-date total return: up 21.4 per cent
We are entering 2024 with inflation trending in the right direction and a surprisingly resilient labour market. The probability of the U.S. Federal Reserve orchestrating a “soft landing” has become the consensus view. We agree with the market’s view that the Federal Reserve is done raising rates but believe that the market is too optimistic in its aggressive Fed rate-cuts outlook for 2024. Earnings estimates are improving and valuations, outside of the technology sector, are reasonable. The so-called Magnificent Seven technology stocks will struggle to repeat their strong 2023 performance, which should help broaden market breadth in 2024. Barring a recession, we believe the market can grind out high single-digit returns next year and would advise investors to diversify across sectors and look for opportunities in some of the lagging sectors of 2023.
Top pick for 2024: Jacobs Engineering Group Inc. (J-N) Engineering firms are benefiting from secular tailwinds and the significant U.S. fiscal infrastructure spending bills. We expect Jacobs’s growth rate will accelerate given its global capabilities in water and environment, energy transition, transportation and advanced manufacturing. Its upcoming cost-savings program should drive 300 basis points of margin expansion and the recent spinoff of its government-services business will make it a pure play engineering firm with a higher margins profile. Given all these positive catalysts, the stock should command a higher valuation multiple, which should help close its valuation discount versus the peer group and drive significant returns in 2024 and beyond. Meanwhile, Boston Scientific remains a core holding for 2024.
Craig Jerusalim, senior portfolio manager, CIBC Asset Management
Last year’s pick: Brookfield Corp. (BN-T)
YTD return: up 24.1 per cent
If the past year has taught us anything, it’s that making macro calls based on sentiment and backwards-looking indicators is a losing prospect. While we have our views on interest rates, inflation and the economy, our best advice for 2024 is to avoid the temptation for market timing. The market will always gyrate up and down, but the bias is unquestionably higher. Pessimists sound really intelligent and prudent, but optimists make money. The best way to add value is to stay fully invested in a well-diversified, balanced portfolio of high-quality, growing companies. Selecting the most resilient and highest-quality companies positions you to survive virtually any economic downturn, but also positions you to thrive once markets inevitably improve.
Top pick for 2024: Last year we selected Brookfield Corporation as our top pick for 2023 because of the significant discount the asset manager was trading at relative to its sum of parts. While we were tempted to stick with Brookfield as our choice for 2024, as the company has only partially closed its discount to net asset value, we see even more upside potential in Trisura Group Ltd. (TSU-T). Trisura is a North American specialty property and casualty insurer with a track record of profitable growth and consistent underwriting profit margins. Despite the company continuing to grow more than 20 per cent per year, while earning a return on equity of 20 per cent, it is still trading at a meagre 12.5x forward earnings. We expect its consistent execution on growth eventually to be recognized by the market with commensurate multiple expansion.
Stephen Takacsy, CEO and chief investment officer, Lester Asset Management
Last year’s picks: Short-term high-yield corporate bonds. Using the BMO Short Corporate Bond ETF as a proxy, YTD total return is 6.2 per cent. Stock picks were Pollard Banknote (PBL-T), up 69.5 per cent YTD; Logistec (LGT-B-T), up 55.8 per cent; Richelieu Hardware (RCH-T), up 21.5 per cent; Cargojet (CJT-T), up 1.7 per cent
With inflation rates now within central banks’ target range of 2 per cent to 3 per cent and the global economy and job market softening, they are done hiking interest rates. This is bullish for fixed-income securities that are trading at historically high yields to maturity and also for certain stocks such as non-cyclical and defensive high-dividend yielding stocks. Also, small and mid-cap stocks have declined to valuations not seen since the 2008 Great Financial Crisis and are bargains compared with large and mega-cap stocks. This has not gone unnoticed by private equity funds that have been paying large premiums to acquire smaller publicly traded Canadian companies lately. We think 2024 will be a good year for balanced portfolios comprised of high-yielding fixed-income securities and a combination of defensive dividend stocks and small and mid-cap stocks.
Top pick for 2024: For conservative investors, my top pick is to invest in an actively managed portfolio of high-yielding fixed-income securities comprised of corporate bonds, hybrid debt and preferred shares that are currently providing attractive annualized returns of 6 per cent to 8 per cent on a total return basis, with very low risk. For more upside, there are many undervalued small and mid-cap stocks to choose from since this asset class has been decimated by institutional outflows and retail fund redemptions. Examples include agricultural equipment maker Ag Growth International (AFN-T), which is benefiting from global demand to upgrade farm infrastructure; funeral services operator Park Lawn (PLC-T), which is riding the tailwinds of an aging population; MDF Commerce (MDF-T), a North American leader in digitizing government-procurement systems; and intelligent transportation solutions pioneer Quarterhill (QTRH-T), which will realize higher margins from its large backlog of electronic tolling and enforcement contracts.
Kim Shannon, founder and co-chief investment officer, Sionna Investment Managers
Last year’s pick: Magna International (MG-T)
YTD return: up 6.5 per cent
History suggests that during inflationary periods we tend to see Canada outperform other markets because of its commodity exposure, and the value style of investing outperforms growth. Our advice: Canadian value. Although predicting market movements is nearly impossible to do consistently well, market history can provide some useful guideposts to steer wary investors. The shift from disinflation to inflation in 2020 suggests that what worked over the last four decades (growthier stocks) is unlikely to be as consistently effective in an inflationary environment like today’s. We collectively know disinflation from our own experience with it, but few investors have a toolkit to outperform during inflation. However, both market history and recent market experience suggests the value investment style should outperform over the long term in this type of market.
Top pick for 2024: We are not surprised by Magna’s recent performance, and we continue to have conviction in it – in fact, we have been selectively adding to our position over the year. Magna is an auto-parts supplier that offers design, engineering and manufacturing for vehicle makers globally. As the fifth-largest supplier in the world, Magna has one of the top reputations for quality, fair pricing and continuous innovation in the industry. Many of the parts Magna produces are agnostic to the type of propulsion system that a vehicle uses. Magna has been investing in the development and supply for EV-specific parts, which has created an opportunity for the company since the continued regulatory pressure to reduce emissions has made electric vehicles and hybrid-electric vehicles more desirable overall. Magna has a strong balance sheet and a seasoned management team focused on generating returns, so we believe this is an attractive opportunity for patient, long-term investors.
François Bourdon, managing partner, Nordis Capital
Last year’s pick: Nutrien Ltd. (NTR-T)
YTD return: down 22.6 per cent
We anticipate an economic slowdown in 2024. In reality, Canada and Europe may already be in a recession. Having a portfolio designed for stability is the right approach for us. Less economic sensitivity with sustainable grocery stores, utilities and health care should comprise a bigger part of one’s portfolio. On the fixed-income side, inflation protection remains attractive through real return bonds because we have entered a new regime where inflation should be above 3 per cent over the longer term. On the more volatile front, I think that uranium stocks will continue to do well as the price of uranium should benefit from renewed interest in nuclear and limited supply.
Top pick for 2024: Last year, we recommended Nutrien because we expected the price of fertilizers to remain high and Nutrien to be a geographically safe producer. Unfortunately, the price of fertilizers fell and Nutrien had production issues. This year, we are proposing an investment in carbon credits, specifically in the California-Quebec regulated market (WCI) that can be accessed through the KraneShares California Carbon Allowance ETF (KCCA-A). This investment is essentially a bet that carbon prices will rise as limits are imposed on greenhouse gas emissions. Polluters offset their emissions with the purchase of carbon allowances, which are based on the price of carbon. KCCA tracks the performance of a portfolio of futures contracts on carbon credits. With the growth of the economy, the demand for regulated carbon credits has risen while the supply is decreasing by a predetermined amount every year. Increasing demand with falling supply generally leads to higher prices. Moreover, there is a floor price that grows by inflation plus 5 per cent every year, reducing long-term risk.
Jason Del Vicario, portfolio manager, and Steven Chen, analyst, at Hillside Wealth | iA Private Wealth Inc.
Last year’s pick: Constellation Software (CSU-T)
YTD return: up 59.4 per cent
Portfolio positioning is timeless. We recommend holding a concentrated portfolio (15 to 25 names) of exclusively high-quality businesses acquired at favourable prices. Once a compounder has been acquired, the biggest risk to the investor becomes themselves. As long as the business continues to generate strong returns on invested capital, the challenge becomes resisting the urge to do something – sell – for the sake of doing something. Hold on and let the compounding work its magic
Top pick for 2024: Our top pick for 2024 is Calnex Solutions (CLX in the U.K.). Its shares have suffered recently because of what we believe is a temporary reduction in telecom CAPEX spending. The company is founder-led and run, has no debt and is a leader in the space of high-end telecom testing equipment. As for last year’s pick, Constellation Software delivered a strong return in 2023 after delivering a negative return in fiscal 2022 for the first time since listing in 2006. The business remains our top holding and the stock likely benefited from some “catch up returns,” in addition to tracking an ever-growing business.
Christine Poole, CEO and managing director, GlobeInvest Capital Management
Last year’s pick: U.S. health care sector
Using the Healthcare Select Sector SPDR fund (XLV) as a proxy, YTD return up 0.8 per cent
Economic growth in 2024 should continue to slow as the lagged impact of high interest rates is fully absorbed. With inflation receding toward the target range, central banks are expected to hold interest rates steady over the near term and then pivot to rate cuts later in the year. Macroeconomic forecasting, however, is highly unreliable and financial markets tend to be volatile and reactive in the short term. Therefore, investors should stay invested within a portfolio asset mix that meets their risk tolerance level, return objectives and liquidity needs, to build wealth over the long term through the power of compounding.
Top pick for 2024: The health care sector was my recommendation in 2023. The long-term fundamentals of the health care sector remain positive, and Thermo Fisher Scientific Inc. (TMO-N) is my top pick in 2024. TMO supplies products and services or the “picks-and shovels” to health care companies, which are needed to develop and manufacture drugs and vaccines, and diagnose diseases. Its businesses are very profitable and more than 80 per cent of its revenues are recurring. A trusted partner with pharma customers because of its scale and capabilities, TMO will participate in the growth from both existing blockbuster drugs and drug pipelines.
Anish Chopra, managing director, Portfolio Management Corp.
Last year’s pick: Kone
YTD return: down 8.2 per cent
As global economic growth is anticipated to further decelerate, we expect a corresponding slowdown in inflation and a stabilization or potential decrease in short-term interest rates. Against this backdrop of a slowing global economy and shifting interest rate scenarios, adopting a long-term investment approach and ensuring diversification within and across diverse asset classes becomes critical. Consequently, portfolios that are well-diversified between equities and fixed income, with a focus on quality assets, income generation and capital preservation, stand to benefit in this environment. This strategy not only mitigates risks but also capitalizes on the evolving economic landscape.
Top pick for 2024: In such a slow-growth environment, investors might find value in turning their attention toward dividend-paying stocks, particularly those backed by robust balance sheets. These stocks typically offer a dual advantage: a potential for steady income through dividends and the likelihood of being more resilient in fluctuating economic conditions. Companies with strong financial foundations are generally better equipped to navigate economic uncertainties, making them potentially safer havens for investors seeking stability in a slowing economy. The utilities sector, and a stock like Emera Inc. (EMA-T) , would be an example. This strategy can provide a balance of income generation and capital preservation, which is particularly crucial in times of economic deceleration.
Ken O’Kennedy, chief investment officer, Dixon Mitchell Investment Counsel
Last year’s picks: Intercontinental Exchange (ICE-N)
YTD return: up 21.8 per cent
Other picks included Brookfield Corp. (BN-T) (YTD return: up 24.1 per cent); Brookfield Asset Management (BAM-T) (YTD return: up 39.2 per cent), and short-term investment grade corporate bonds.
Don’t underestimate the value of bonds, especially after strong performance in equities this year, as investment-grade bonds offer appealing nominal and real yields. Look for companies with characteristics like a favourable industry structure, competitive advantage, sound business model and capable management team. Avoid an excessive valuation focus, which can lead to businesses in secular decline and permanent capital loss. Consider increasing your allocation to quality small-cap stocks, where valuations have become increasingly attractive. Lastly, keep your costs low and turnover down.
Top pick for 2024: We recommended Intercontinental Exchange (ICE) last year, and our enthusiasm for this business remains unwavering. ICE operates global financial exchanges and clearing houses, effectively earning a toll on capital-market activities in equities, fixed income and commodities, in addition to providing data sets to financial-market participants. Historically, ICE has been successful in identifying businesses or markets ripe for an analog-to-digital transformation. Notably, ICE’s acquisitions of Ellie Mae and Black Knight in the past three years have solidified its dominant position in the U.S. mortgage industry. Although mortgage volumes have declined with rising interest rates, exerting cyclical pressure on this vertical, ICE has made impressive strides in its subscription and data businesses, amplifying recurring revenue streams. As the U.S. mortgage industry undergoes a digital transformation, we foresee substantial value waiting to be unlocked for ICE.
(Year-to-date total returns are from Morningstar and as of Dec. 14.)