PI Financial’s Guy Lapierre opts for well-established, cash-paying Canadian stocks, especially as our economy benefits from high commodity demand and prices.
Despite US Federal Reserve and Bank of Canada speeches in April affirming their disinterest in interest hikes before at least 2022 (if not later), Vancouver-area portfolio manager Guy Lapierre says corporate bond rates portend inflation well before then.
“The revenge of fundamentals is coming,” warned Mr. Lapierre, a vice-president and branch manager for PI Financial, in an April 19 phone interview with Investor’s Digest. “Uncanny similarities” to the dot-com boom at the moment include high disposable wealth, low interest rates and governments’ strong encouragement of growth, adding up to euphoria today and a recipe for recession tomorrow (or whenever prices fall back to Earth).
Keeping portfolios fully invested
Nevertheless, Mr. Lapierre says he has kept his clients’ portfolios fully invested rather than retreating to cash. “We have a raging pandemic . . . but economic opportunity is high.”
Looking ahead, the portfolio manager says, “I see us on an inflection point with interest rates presumed to rise but how soon is a difference of opinion between the bond market, and I would put myself in there, and (Federal Reserve) Chairman (Jerome) Powell.”
At present, rates on three-to-five-year corporate bonds range from 2.25 per cent to 2.5 per cent, which he expects to rise to between 3.5 per cent and 4.5 per cent by September.
“Companies with large cash flows are able to raise money at near record-low levels and they are doing that without a need for it,” he explains. This has allowed them to consolidate their borrowing and pare down debt by paying off existing bonds early. “Our favourite bonds are universally doing early redemption.”
Looking ahead, Mr. Lapierre says, “I see a huge volume of issuance, to satisfy a high demand for yield,” in turn leading to a drop in bond prices.
Bank of Canada governor Tiff Macklem said April 21 that the bank would scale back purchases of federal government bonds from $4 billion weekly to $3 billion, a first step in slowing COVID stimulus before raising the overnight interest rate from 0.25 per cent, likely in the second half of 2022.
Per the central bank’s April monetary policy report, it now forecasts a 6.5 per cent GDP increase in 2021, compared to four per cent previously.
“I see the markets continuing upward.”
However, low interest rates ignore rising prices for commodities such as fuel and food, a result of better-off people having cash on hand but few places to spend it.
“I see the markets continuing upward. There’s just too much liquidity in the system,” says Mr. Lapierre. This inflation has affected investments as well.
“There’s simply an incredible amount of money looking for income and safety, which, paradoxically, is leading some people to look at alternative investments, such as cryptocurrencies.”
The portfolio manager agrees that blockchain technology and renewable energy are important trends for the future, but likens them to “a teenager planning to take over the world, someday, but it’s not to ignore that he still needs to go to work every day.”
For exposure to innovation, Mr. Lapierre relies on the Evolve Innovation Index ETF (TSX—EDGE), a managed fund that concentrates on smaller, more volatile holdings in eight sectors, and rebalances on a quarterly basis to force diversification rather than loading up on the hot theme of the day.
“I would definitely not recommend it without an advisor,” the portfolio manager says. “It’s what we respond to any individual that’s looking at GameStop, the so-called meme stocks, the cryptocurrencies as an asset holding, and the EV (electric vehicles) market, which I believe is so overvalued given its ability to deliver cars.”
Best stocks for current buying
As for his “best buys”, Mr. Lapierre opts for well-established, cash-paying Canadian stocks, especially as our economy benefits from high commodity demand and prices.
For example, since he is scaling back on fixed-income investments, the portfolio manager has replaced them with shares of “bond equivalent” and Canada’s top telecommunications company, BCE Inc. (TSX—BCE; NYSE—BCE).
“BCE is a stable stock with very little volatility that’s currently producing a six per cent dividend yield,” he says.
The portfolio manager says he also remains interested in adding to Canadian Pacific Railway Limited (TSX—CP; NYSE—CP) and Canadian National Railway Company (TSX—CNR; NYSE—CNI) given their role in shipping commodities, particularly food staples.
Mr. Lapierre points out, “Commodities such as soybeans, corn, wheat, rye, are all at record levels, reflecting strong demand and the increased focus on quality food consumption while everybody is at home,” translating to more rail shipments.
This is an edited version of an article that was originally published for subscribers in the May 7, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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