The bottom line is that we continue to be cautious on the outlook for stocks and remain bearish in our view of the bond market as well. Global economic growth remains weak, profit margins have peaked for this cycle and input costs, most noticeably wages, are starting to rise again. Despite those risks, stocks are trading near record valuations! By default, this has lead to higher cash levels in all of our managed portfolios. Our favoured sectors remain U.S. technology stocks, due to their reasonable valuation and continued growth, as well as Canadian ‘deep value’ stocks. We came into 2017 with a ‘trading buy’ on the gold stocks. That group surged by almost 100% in the first half of 2016 but then came under pressure in the 2nd half, with many mid-sized producers falling 30-40%. With inflation expectations on the rise we see the potential for gold to recover recent losses. Moreover, gold rallied in the face of a rising U.S. dollar, which was a notable change in trend. Finally, the stocks were actually showing decent cash flow growth and trading at more reasonable valuations than they have in decades. We added to positions in Detour Gold, Kirkland Lake and B2 Gold.

We see a similar trade developing for the Canadian oil stocks, which have under-performed thus far in 2017 despite relatively good OPEC compliance with the production cuts. Worries about rising U.S. shale oil production have kept crude prices in the US$50-55 range while some fears about new U.S. restrictions on trade have lead to heavy selling of Canadian energy names by U.S. investors. Some of these fears may be overblown and we see at least a ‘trading bounce’ in this group, particularly with the recently announced re-filing of the application for the Keystone XL Pipeline. Some of the names we have added recently include Tourmaline Oil (which made a great re-purchase of assets from Shell Oil last year), Seven Generations (for strong growth in the prolific Montney area in central Alberta) and Crescent Point Energy, due to its low valuation and production growth.

We also still have an overweight position in Canadian preferred shares given their yields of over 5% and the increasing institutional interest in this sector as a source of income. Preferred shares have had a strong recovery over the past six months as fears about a lower re-investment rate for the ‘rate reset’ preferred shares has diminished.

One of the more risky, smaller stocks in our portfolios, Enablence Technology, has had difficulties over the past few years as development of their core optical components products has taken much longer than expected. Some good news now is that industry conditions appear to be picking up sharply. Another optical component supplier, Oclaro, positively pre-announced its December quarter results. This is further evidence of the health of the optical components market following Applied Optoelectronics positive pre-announcement. Ciena and Cisco are likely buyers of optical transceivers, so the upside may also bode well for these systems suppliers as it shows the power of the optical supercycle that is still in early days. The difference between Oclaro and Enablence is in the design. Oclaro’s optical products are still electronics based (discreet) while Enablence’s are chip based (integrated). This gives Enablence significant cost and performance advantages in the long term. Enablence’s 100G Telecom product is the first fully integrated product in the world. Hence why it has taken time and patience to get to where it is today. 200 units were made and shipped to ZTE in Nov/Dec, priced at US$5000 per pair. Production should ramp considerably in Q1 and Q2 of this year. Hopefully our patience with this stock will start to pay off as valuations of other stocks in this sector are significantly higher than Enablence.

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