Also available in PDF: MIR Portfolios April 2020
Investment Commentary April 2020
Fund Flows into Capital Markets
Over the last several weeks fund flows have turned decidedly bullish with monies pouring back into equities after their recent decline. It is quite astonishing how quickly the tide has turned from very bearish to very bullish.
US Yield Curve
The US 10 year minus 2 year Treasury yield curve at 50 basis points has risen marginally from close to zero last month, but remains historically quite low. The yield on the 10 year US Treasury is currently at a low rate of 0.77%.
US Corporate Debt Spreads
US High Yield spreads over US Treasuries rose sharply to over 11% in the midst of the recent security market selloff, but have subsequently fallen back a little to around 9%. While this is not a good sign, the drop back to 9% is positive. The US investment grade corporate bond spread over US Treasuries remains low and stable. This can be attributed to the recent Federal Reserve monetary stimulus.
US / China Trade Issues
No change since last month
China’s Coronavirus Implications
While the trend in both new cases and deaths in China has actually fallen recently, the stats in the rest of the world are not as favourable. The growth in new cases and deaths will eventually begin to level off when the effects of massive government global lockdowns combined with the introduction of some existing anti-viral drugs that may prove effective in slowing the progression of the virus. A vaccine is not likely until at least twelve months, so it is essential that these current lockdowns and quarantines continue.
Equity Market Valuations
P/E Multiples have come down in this market decline, but the recent move back up in the market leaves valuations only modestly lower than previously. The earnings outlook for this year is almost impossible to predict accurately, thus making the P/E multiple estimate difficult to assess in any case.
US Corporate Profit Growth
Year over year earnings growth expectations have collapsed with earnings declines more likely.
Global Economic Recession
We are clearly in the midst of a global economic recession.
Central Bank Monetary Policy
Global central banks continue cutting rates to try to mitigate the economic damages.
Global Fiscal Policy Measures
Every global economy continues to stimulate their domestic economies to try to reduce the negative effects from the current economic problems.
It is obvious that the equity markets were getting oversold leading to the recent market recovery. Also, the Covid-19 stats are gradually improving somewhat although this can change on a daily basis. As a result of the extreme lockdowns and quarantining in China both the number of new cases and new deaths has fallen. This same trend will eventually transpire in the rest of the world.
I am recommending a reduction of 10% in cash with the monies to be redeployed back into equities. While the overall benchmark US and Canadian equities are still down 19% and 23% respectively from their recent highs, many stocks have fallen substantially more than that.
While I am not recommending any changes from last month, I am adding a new category to the fixed income area- inflation protected US Treasury bonds or TIPS for short. This type of bond tends to perform well when inflation is rising quickly. Currently, in the midst of a recession with inflation being muted, is not a good time to be acquiring TIP bonds. However, when this recession is over it may well be a good time if inflation starts to pick up.
Equity Sector Weights
Taking into consideration the market meltdown of all equity sectors, I am advising that the 10% cash be put back into all sectors, and not simply defensive ones.
Despite rumours of a possible OPEC and Russian agreement in regards to cutting crude oil production, the collapse in demand from the Covid slowdown in global economies will continue to pressure crude prices. I remain underweight Energy until a clearer picture unfolds on production coming from OPEC, Russia and the US.
I remain underweight Financials.
I remain overweight Technology, Industrials, Utilities, Reits and Consumer Discretionary.
I remain market weight Materials and Communications.
I am increasing my weight in Consumer Staples from underweight to market weight.
Lastly, I am increasing my Healthcare weight from market weight to overweight. Healthcare is traditionally a defensive group and today’s announcement of Bernie Saunders stopping his leadership makes the outlook for a massive change in US healthcare seem more unlikely with a Democratic victory in October led by Biden.
Improve the Quality of your holdings
In this market meltdown, no companies were spared from registering significant price declines. Now is a great time to be making switches from poorer quality, highly leveraged companies into better quality ones that can better the storm of an economic recession.
In a recent blog I added NextEra Energy, the US utility to both portfolios. The regulatory environment in Florida is better than most US states and this is where the company serves over 5.4 million customers. NextEra also owns a majority stake on one of the world’s largest wind and solar renewable energy companies.
In the technology sector, I am adding the Canadian company, CGI to the Growth portfolio. While the company does not pay a dividend, it is a leading global provider of IT services and has a strong balance sheet. The shares have come off over 28% recently and offer reasonable value at current levels with a 16.2 times PE on this year’s earnings.
In the Industrials sector I am removing NFI Group from both portfolios. The company has been experiencing a slowdown in the North American bus market long before the current slowdown caused by the Covid virus. The company’s balance sheet is not pristine and they had to cut their dividend to improve their financial condition somewhat.
In the Communications sector, I am adding Facebook to the Growth Portfolio. The shares are off 22% from their recent highs and the P/E multiple on this years earnings is a reasonable 20.6 times given the company’s long term earnings growth rates both historically and projected.
Also please take note that United Technologies has recently merged with Raytheon. The new company name is Raytheon Technologies with a stock symbol RTX. Shareholders of the former United Technologies will also receive two corporate spinoffs- Carrier Global CARR and Otis OTIS. I am recommending the deletion of both Carrier and Otis from both portfolios. The Carrier and Otis spinoffs are relatively small and are resulting in most institutional investors liquidating their positions.
In the Materials sector, I am adding the US gold bullion ETF, GLD to the Growth portfolio. Gold has traditionally performed well in previous recessions with declining interest rates and very accommodative monetary policy.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (April 2020)|
|Cash||Alterna Bank – High Interest Savings (2.00% current )||Alterna Bank – High Interest Savings (2.00% current)|
|EQ Bank – High Interest Savings ( 2.00% current)||EQ Bank – High Interest Savings ( 2.00% current)|
|Bonds -Regular||iShares XSB Short Term||iShares XSB Short Term|
|iShares CBO 1-5 Ladder Corp||iShares CBO 1-5 Ladder Corp|
|iShares CLF 1-5 Ladder Gov’t||iShares CLF 1-5 Ladder Gov’t|
|Common Stocks||Security||Dividend Yield %||Security||Dividend Yield %|
|Financials||Royal Bank RY||5.04||Royal Bank RY||5.04|
|Intact Financial IFC||2.42||Intact Financial IFC||2.42|
|TD TD||5.28||TD TD||5.28|
|Sun Life SLF||4.78||Sun Life SLF||4.78|
|JP Morgan JPM US||3.97||JP Morgan JPM US||3.97|
|Manulife Fin’l MFC||6.71||Manulife Fin’l MFC||6.71|
|Bank of America BAC US||3.25||Bank of America BAC US||3.25|
|Morgan Stanley MS US||3.79||Morgan Stanley MS US||3.79|
|T. Rowe Price TROW US||3.53||T. Rowe Price TROW US||3.53|
|Allstate ALL US||2.33||Allstate ALL US||2.33|
|Energy||Suncor SU||8.08||Suncor SU||8.08|
|Canadian Natural Resources CNQ||9.11||Canadian Natural Resources CNQ||9.11|
|Freehold FRU||17.55||Freehold FRU||17.55|
|Enbridge ENB||8.23||Enbridge ENB||8.23|
|TC Energy TRP||5.06||TC Energy TRP||5.06|
|Whitecap Resources WCP||23.59||Whitecap Resources WXP||23.59|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.67||Agnico Eagle AEM||1.67|
|Franco Nevada FNV||0.95||Franco Nevada FNV||0.95|
|VanEck Vectors Gold ETF GDX US||0.73||VanEck Vectors Gold ETF GDX US||0.73|
|SPDR Gold Bullion GLD US||0.00|
|BMO Global Base Metals ETF ZMT||3.94||BMO Global Base Metals ETF ZMT||3.94|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.37|
|Industrials||Toromont TIH||1.95||Toromont TIH||1.95|
|Air Products APD US||2.65||Air Products APD US||2.65|
|WSP Global WSP||1.77||WSP Global WSP||1.77|
|Raytheon Technologies RTX US||5.09||Raytheon Technologies RTX US||5.09|
|Stantec STN||1.57||Stantec STN||1.57|
|Aecon Group ARE||5.04||Aecon Group ARE||5.04|
|Honeywell HON US||2.66||Honeywell HON US||2.66|
|TFI Int’l TFII||3.29||TFI Int’l TFII||3.29|
|Consumer Discretionary||Home Depot HD US||3.12||Home Depot HD US||3.12|
|Target TGT US||2.69||Target TGT US||2.69|
|Restaurant Brands Int’l QSR||5.35||Restaurant Brands Int’l QSR||5.35|
|Amazon AMZN US||0.00|
|Lowes LOW US||2.42||Lowes LOW US||2.42|
|Communication Services||Rogers B RCI.B||3.18||Rogers B RCI.B||3.18|
|Comcast CMCSA US||2.71||Comcast CMCSA US||2.71|
|Telus T||5.07||Telus T||5.07|
|Facebook FB US||0.00|
|VanEck Video Gaming ESPO US||0.21|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.76||Alimentation Couche Tard ATD.b||0.76|
|Loblaws L||1.68||Loblaws L||1.68|
|Sysco SYY US||3.91||Sysco SYY US||3.91|
|Unilever PLC UL US||3.58||Unilever PLC UL US||3.58|
|Technology||Apple AAPL US||1.19||Apple AAPL US||1.19|
|Microsoft MSFT US||1.25||Microsoft MSFT US||1.25|
|Open Text OTEX||2.02||Open Text OTEX||2.02|
|Paychex PAYX US||3.83||Paychex PAYX US||3.83|
|Logitech Int’l LOGI US ADR||1.70||Logitech Int’l LOGI US ADR||1.70|
|Qualcomm QCOM US||3.41||Qualcomm QCOM US||3.41|
|CGI Inc. GIB.A||0.00|
|ETFMG Prime Cyber Sec. HACK US||1.73|
|Visa V US||0.71|
|Utilities||Algonquin Power AQN||4.23||Algonquin Power AQN||4.23|
|Northland Power NPI||4.21||Northland Power NPI||4.21|
|NextEra Energy NEE US||2.45||NextEra Energy NEE US||2.45|
|Fortis FTS||3.49||Fortis FTS||3.49|
|Healthcare||Becton Dickinson BDX US||1.33||Becton Dickinson BDX US||1.33|
|Merck MRK US||3.11||Merck MRK US||3.11|
|United Healthcare UNH US||1.74||United Healthcare UNH US||1.74|
|CVS Healthcare CVS US||3.52||CVS Healthcare CVS US||3.52|
|Bristol Myers BMY US||3.16||Bristol Myers BMY US||3.16|
|Danaher DHR US||0.52|
|Thermo Fisher Scientific TMO US||0.30|
|Straumann ADR SAUHY US *||0.82|
|Real Estate||Cdn Apt. REIT CAR.un||3.25||Cdn. Apt. REIT CAR.un||3.25|
|CT Reit CRT.un||6.49||CT Reit CRT.un||6.49|
|US Real Estate SPDR XLRE US||3.50||US Real Estate SPDR XLRE US||3.50|
|InterRent REIT IIP.un||2.35||InterRent REIT IIP.un||2.35|
|Dream Industrial DIR.un||7.12||Dream Industrial DIR.un||7.12|
|WPT Ind. WIR.un||8.54||WPT Ind. WIR.un||8.54|
|Summit REIT SMU.un||6.06||Summit REIT SMU.un||6.06|
|European Equity||iShares MSCI Europe XEU||4.31||iShares MSCI Europe XEU||4.31|
* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.
|McMurtry Investment Report – Sector Weights (April 2020)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix April 2020)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Regular||20.00||10.00|
|Bonds – High Yield||0.00||0.00|
|Bonds – Tips||0.00||0.00|