After the biggest tax-reform since the Reagan administration, it is useful to have tax-smart investing strategies for today’s world. Both the US and international markets are expected to rise. With that in mind, CFA Christina Pool provides a smart option investment strategy to balance your portfolio.
Market outlook for 2018 is front-page news
Whatever the implications of the United States government’s tax reform package for individual taxpayers, CFA Christine Poole predicts it will buoy corporate earnings south of the border. Ms. Poole is CEO and managing director of GlobeInvest Capital Management Inc. in Toronto.
The analyst concedes that the S&P 500 was fast approaching the record length for trading days without a pullback of five per cent or more (as of late December, the figure hovered around 390 days) and also notes price-to-earnings (P/E) ratios are somewhat higher than usual historical levels, similar to the situation in Canada.
Nevertheless, she asserts that S&P 500 companies’ results as a whole will deliver the earnings necessary to reduce P/E to a more reasonable level, thanks in no small part to the Republicans’ tax changes. The tax reform package includes permanent corporate tax cuts, alongside goodies such as tax exemptions on capital spending for five years.
Stock market predictions for 2018
She forecasts that, all told, the package will boost the collective S&P 500’s earnings by seven per cent to eight per cent in 2018 and lower P/E ratios to about 17 times. Ms. Poole says an S&P 500 pullback could occur but adds this would not start a bear market on its own. She argues this is unlikely since the US economy has recovered at a rate of less than three per cent yearly from 2009 through 2016, and the Federal Reserve will probably not raise interest rates because there is no inflationary pressure to do so.
Asked about the Canadian markets, she replies that the energy sector’s high profile has kept them down. “The obvious overhangs are the trade situation, which we’ll just have to monitor to see how it goes . . . but it seems like things are slowly improving here as well.”
The analyst stresses that the Bank of Canada’s 2017 interest rate hikes have merely returned it to where it was in the last two years. Of new mortgage rules, Ms. Poole says, “Potentially, it might slow the housing markets, but we think it’s going to be manageable.” She adds, “With interest rates quite low, affordability is still quite high,” so buying and borrowing will continue. In the meantime, bank governor Stephen Poloz has stated he is waiting on the sidelines to observe conditions before making any more changes.
A global fund strategy for 2018
Outside Canada and the US, the analyst also notes optimistic indicators. “We think that the global economy continues to improve. In most geographies, things are still solidly expanding.” She cites China’s expected 2017 growth rate of 6.5 per cent to seven per cent, in addition to European and Japanese improvements this year as examples. “There are no signs of a recession on the horizon.”
Both of Ms. Poole’s ‘best buy’ selections, Brookfield Asset Management Inc. (TSX—BAM.A; NYSE—BAM) and Unilever PLC (NYSE—UL) are more international than domestic, putting them in good stead to benefit from worldwide growth. BAM is the parent of several operating subsidiaries (themselves traded publicly) under the Brookfield banner focused on property and real estate, renewable power, infrastructure, and private equity, with US$265 billion in assets under management.
Just 18 per cent of Brookfield’s revenue comes from Canada. Another 33 per cent comes from the US, with the rest spread throughout regions as far flung as Europe, Brazil and Australia.
Ms. Poole says the company looks for long-term assets to invest in that have high barriers to entry and can provide a steady stream of cash flow. The analyst lauds its long-term strategic approach to business. Where others might buy a rundown commercial property and simply lease it, Brookfield would possibly invest in redevelopment and turn it into a condo, she suggests.
Global quality stocks
The company yields just 1.4 per cent, but its dividend has stayed stable and Brookfield has plenty of cash on hand to make opportunistic acquisitions. “It’s a good way for a retail investor to play in that realm of investing in hard assets on a global basis,” Ms. Poole explains. “We’ve chosen to invest at the parent level because that gives you exposure to all four. They’re more growth-oriented than some of their operating subsidiaries.” For an investor looking for income, she suggests investing directly in a BAM subsidiary, such as renewable energy or property, which yield about 5.5 per cent.
Meanwhile, Unilever consists of personal care, food, home care, and refreshments segments. The consumer staples stock boasts that its products reach 2.5 billion consumers a day. It intends to expand its share in emerging markets. They make up 57 per cent of sales at present and want to ramp that figure up to 75 per cent by 2020, despite having just a tenth of the market penetration compared to developed countries. “It’s all about the growing middle class in that area,” says Ms. Poole. Management projects there will be 600 million more middle-class people in emerging markets by 2030.
Unilever’s dividend, which yields 2.8 per cent, has increased eight per cent annually on average since 1979, the analyst adds.
Christine Poole MBA, CFA. CEO, and Managing Director of GlobeInvest Capital Management Inc. Christine Poole has been working with major financial institutions since 1985. During this time, she has been developing her expertise and skill in both portfolio management and securities analysis, while expanding her knowledge in both global and domestic equities.
This is an edited version of an article that was originally published for subscribers in the January 5, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
Investor’s Digest of Canada, MPL Communications Inc.
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