2023 PicksRarely has there been a year when fund managers have breathed such a collective sigh of relief that it’s over. In 2022, stocks sank here and abroad, bonds posted record losses, and no matter one’s investing style – growth, dividend income, small cap, you name it – it just didn’t work. But a new year beckons, and money managers are eager to put their investment chops to work. To do so, they’ll need to navigate an expected slowdown that may drag major economies into recession and see corporate profits go into a tailspin.
We asked Canadian fund managers for their best advice on how to position portfolios for 2023, as well as for a top pick.
Ken O’Kennedy, chief investment officer, Dixon Mitchell Investment Counsel
Over the last 12 to 18 months we have been increasing allocations to Canada over the U.S. in our internal asset allocation. We continue this positioning in 2023. While we believe the U.S. has some of the strongest competitively positioned and best run companies in the world, they are broadly priced this way and hence could be susceptible to further valuation risk. Despite significant outperformance of the Canadian market in 2022, we are finding attractive value in Canada, especially in high quality small cap businesses. Furthermore, we would not abandon bonds after a truly horrible 2022, as we expect this asset class will once again provide diversification benefits and risk mitigation for investor portfolios.
Top picks: Despite the noisy macro headlines and a bond market predicting a recession in 2023 via an inverted yield curve, we believe the macro backdrop is creating several opportunities for investors in both Canada and the U.S., and even in bonds. In the U.S., we think Intercontinental Exchange
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provides attractive value for a business producing prodigious cash flow with a track record of value creating M&A. In the Canadian market, Brookfield Corp.
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are attractive post-split. Many short-term investment grade corporate bonds are attractive, as those with maturities of one to three years are yielding between 4.5 per cent and 5 per cent. Craig Jerusalim, senior portfolio manager, CIBC Asset Management
2023 is shaping up to be a clash between expectations and outcomes as central banks battle inflation by raising interest rates to purposefully temper demand. While defensive sectors like staples and utilities may feel safer in this environment, their expensive valuations leave them exposed for an ultimate equity rally, whenever that occurs. Unlike early in this cycle, when the highest growth stocks traded at elevated multiples, today there are many opportunities to uncover companies with above average growth trading at below market multiples. So long as these companies have prudent balance sheets, predictable cash flows and exhibit strong pricing power, there are many ripe opportunities for good old-fashioned stock picking in 2023.
Top pick: Energy producers such as Canadian Natural and Arc Resources are well positioned for the ultimate reopening of the Chinese economy as well as the more balanced global supply/demand picture for energy. However, our top pick for 2023 is Brookfield Corp. Following the successful spinout of a 25-per-cent stake of their asset manager, the corporation, which also owns stakes in Brookfield Infrastructure, Brookfield Renewable, Brookfield Business Partners, in addition to insurance and tier one real estate, is trading at too great a discount to its parts to ignore. A backdrop of moderate growth and elevated inflation is almost ideal for this owner of inflation-protected real assets. The company’s stellar track record of compounding capital through market cycles will ultimately be recognized, it’s just a matter of time.