Stock picks to watch amid a soft landing

Amid the possibility of a soft landing for the global economy, investors can look for several opportunities in equities, a portfolio manager says.

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Tighter financial conditions resulting from rate hikes, as well as the normalization of supply chains, have helped reduce inflation from its peak of about 9% in June 2022 to about 3% in January 2024, noted Natalie Taylor, portfolio manager with CIBC Asset Management, in a recent interview.

However, inflation still exceeds central banks’ 2% target — “a level where rate cuts would be justifed,” she said.

Continued economic strength, particularly in employment and U.S. consumer confidence, could hinder the decline in inflation, potentially eliminating the need for rate cuts in 2024 or delaying them.

“We’re at an interesting crossroads right now, where the economy continues to do well and, in many areas, re-accelerate,” Taylor said. 

For a soft landing, she emphasized the need for a “Goldilocks scenario,” in which “growth is solid but not too strong, to continue the drive in global equities higher and to keep the dream of lower rates in 2024 alive.”

Apart from the outlook on growth and interest rates, Taylor said several factors could influence the performance of equities this year. 

First, she cited upcoming elections across many democracies worldwide, including the potential rematch between Biden and Trump in the U.S.

South of the border, “a change in administration could result in additional tariffs, lower corporate taxes, a potential delay in the energy transition, more [mergers and acquisitions] and a pullback in government spending,” Taylor said.

Geopolitical tensions also remain a focus, with potential conflicts in various regions posing risks to global commodity prices and supply chains, she said. 

Taylor also noted the implications of tighter financial conditions on real estate markets.

“Since the financial turmoil in March of ’23, [U.S.] regional banks have pulled back on commercial real estate lending,” she said. “And there’s been a lack of transactions in the real estate space and very poor visibility on prices.”

If transactions pick up this year, “we could see some losses crystallized, and potential impact, or ripple effect, through the economy — the degree of which is unclear,” she said.

In addition, Taylor noted the role of artificial intelligence (AI) in driving market strength, particularly in the technology sector. While demand for AI-related products continues to surge, Taylor said a risk is that, at some point, capacity limitations could restrict growth.

Despite the potential impact these factors could have on equities, Taylor expressed optimism. 

“The current market is very dynamic, but rife with opportunities from a stock-seeking perspective across many different sectors,” she said. 

Taylor highlighted potential growth in transportation stocks, particularly rails and less-than-truckload companies, “which are poised to grow volumes again after a freight recession experienced in 2023,” she said. Her picks were Canadian Pacific Railway and TFI International Inc.

Within financials, Taylor said Manulife presented an “interesting opportunity.”

While higher interest rates have helped increase demand for life insurers’ products and boosted their portfolio returns, Manulife’s stock has traded at a discount relative to peers due to concerns about its long-term care business, she said. Manulife reduced its exposure to that businees in a transaction at the end of 2023, “and this is a trend we expect to continue,” she said. “These actions will release capital and improve profitability, which should result in a re-rating in the stock over time.”

In industrials, she named engineering and design firm WSP with its strong growth prospects.

The firm’s recent growth has been “supercharged,” she said, “driven by infrastructure investment and energy transition projects, which we expect to continue for some time.”

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