Also available in PDF: MIR Portfolios August 2020
Investment Commentary August 2020
US Yield Curve
The 10 minus 2 year US Treasury yield curve tightened to 50 basis points from 59 last month. This level is low historically but still above zero. In January of this year it was 0.35% and in September, 2019 it was close to zero. The recent flattening of the curve has no immediate repercussions.
US Corporate Debt Spreads
The current US investment grade spread over US Treasuries remained tight at 1.79%. This compares favourably to the 4.5% spread during the last recession of 2007-2008 and to its recent 52 week high of 4.9%. This recent narrowing of the spread is bullish for the economy and it may imply that the worst of this recent downturn is behind us.
US / China Trade Issues
These issues are escalating dramatically and are likely to continue into the US election this fall. Trump’s popularity in the polls is falling sharply and he probably thinks that playing hardball on the trade front with China may get him some votes domestically in the election this fall.
Covid – 19 Health Stats
Both globally and in the US, daily new cases of the virus continue to remain very high. This is a frightening trend. The gradual ending of lockdowns is resulting in the recent upsurge.
Equity Market Valuations
The forward PE of the S&P 500 index continues to rise and is currently in excess of 22 times this year’s earnings. Taking into account that 2020 is virtually a total write-off in terms of economic activity, market valuations start to look better using 2021 earnings.
US Corporate Profit Growth
US corporate earnings reports are coming in better than expected, but it is important to keep in mind that consensus numbers have already been taken down sharply.
Global Economic Recession
As the global lockdowns end, economic growth is picking up but in fits and starts as opposed to straight up. Certain industries such as restaurants, pubs, airlines, cruise lines, women’s clothing retailers have largely reopened but at a 30-40% capacity level. This is clearly not profitable for these industries.
Central Bank Monetary Policy
The US Federal Reserve Bank and all the global central banks remain committed to a very accommodative monetary policy where interest rates will stay low for an extended period of time.
Asset Mix
I am not making any changes to the asset mix of either portfolios. Having 30% cash at this time to weather any further disappointments with economic growth and the introduction of an effective vaccine that is available for everyone is warranted. The additional uncertainty of an upcoming US election adds to the wall of worry for equity markets as does the escalating trade war between the US and China.
Equity Sector Weights
I am not making any material changes to my equity sector weights from last month. I remain overweight my North American benchmark weights Industrials, Consumer Discretionary, Technology, Utilities and Healthcare. I remain market weight Financials, Energy, Materials, Communications and Consumer Staples. Lastly, I remain underweight Reits, but have reduced my underweight somewhat from last month.
Individual Positions
On a blog dated July 7th I deleted Fiera Capital from both portfolios in the Financial services sector. The senior investment manager left the firm and this poses long term risks of losing assets under management to a competitor.
On a blog dated July 15th, I added Brookfield Asset Management to both portfolios in the Financial Services sector. This company is a play on the global economic recovery.
On a July 27th blog, I recommended a switch out of Intel into the SPDR US semiconductor ETF, XSD. While Intel announced a solid quarter, the company delayed the introduction of a new microchip for at least six months, giving their competitors a distinct advantage.
On August 7th, I recommended a switch out of Restaurant Brands into Dollarama for both portfolios in the Consumer Discretionary area. Tim Hortons continues to have difficulty with their same store sales growth. Taking into account the pandemic daily stats continue to trend higher, the outlook for the restaurant industry remains subdued at best. On the other hand, Dollarama is doing well in this pandemic and is also expanding its number of stores.
Lastly, I am adding Capital Power to both portfolios in the Utilities sector. The company has been transitioning away from coal into both natural gas and renewable energy wind and solar powered facilities in both Canada and the US. The company’s earnings per share are expected to grow sharply over the next few years with their expansion plans. The shares remain cheap on a valuation basis relative to their peers and offer an attractive dividend of 6.7%.
Peter McMurtry, B.Com, CFA
Financial Writer
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McMurtry Investment Report – Portfolios (August 2020) | ||||
Income | Growth | |||
Cash | Alterna Bank – High Interest Savings (1.69% current ) | Alterna Bank – High Interest Savings (1.69% current) | ||
EQ Bank – Savings Plus ( 1.70% current) | EQ Bank – Savings Plus ( 1.70% 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 | 4.53 | Royal Bank RY | 4.53 |
Bank of Nova Scotia BNS | 6.33 | Bank of Nova Scotia BNS | 6.33 | |
Intact Financial IFC | 2.29 | Intact Financial IFC | 2.29 | |
Brookfield Asset MGT. BAM.A | 1.52 | Brookfield Asset MGT. BAM.A | 1.52 | |
TD TD | 5.16 | TD TD | 5.16 | |
Sun Life SLF | 4.00 | Sun Life SLF | 4.00 | |
JP Morgan JPM US | 3.62 | JP Morgan JPM US | 3.62 | |
Manulife Fin’l MFC | 5.72 | Manulife Fin’l MFC | 5.72 | |
Bank of America BAC US | 2,76 | Bank of America BAC US | 2.76 | |
Morgan Stanley MS US | 2.78 | Morgan Stanley MS US | 2.78 | |
T. Rowe Price TROW US | 2.58 | T. Rowe Price TROW US | 2.58 | |
Allstate ALL US | 2.23 | Allstate ALL US | 2.23 | |
Energy | Suncor SU | 3.89 | Suncor SU | 3.89 |
Canadian Natural Resources CNQ | 6.36 | Canadian Natural Resources CNQ | 6.36 | |
Freehold FRU | 4.27 | Freehold FRU | 4.27 | |
Enbridge ENB | 7.34 | Enbridge ENB | 7.34 | |
TC Energy TRP | 5.05 | TC Energy TRP | 5.05 | |
Whitecap Resources WCP | 6.63 | Whitecap Resources WXP | 6.63 | |
Parex Resources PXT | 0.00 | |||
Materials | Agnico Eagle AEM | 0.96 | Agnico Eagle AEM | 0.96 |
Franco Nevada FNV | 0.67 | Franco Nevada FNV | 0.67 | |
VanEck Vectors Gold ETF GDX US | 0.45 | VanEck Vectors Gold ETF GDX US | 0.45 | |
SPDR Gold Bullion GLD US | 0.00 | |||
BMO Global Base Metals ETF ZMT | 2.73 | BMO Global Base Metals ETF ZMT | 2.73 | |
Osisko Metals OM.V | 0.00 | |||
iShares Global Gold ETF XGD | 0.13 | |||
Industrials | Toromont TIH | 1.70 | Toromont TIH | 1.70 |
Air Products APD US | 1.90 | Air Products APD US | 1.90 | |
WSP Global WSP | 1.72 | WSP Global WSP | 1.72 | |
CNR | 1.72 | CNR | 1.72 | |
Raytheon Technologies RTX US | 3.10 | Raytheon Technologies RTX US | 3.10 | |
Stantec STN | 1.41 | Stantec STN | 1.41 | |
Aecon Group ARE | 4.53 | Aecon Group ARE | 4.53 | |
Honeywell HON US | 2.32 | Honeywell HON US | 2.32 | |
TFI Int’l TFII | 1.76 | TFI Int’l TFII | 1.76 | |
Consumer Discretionary | Home Depot HD US | 2.21 | Home Depot HD US | 2.21 |
Target TGT US | 2.06 | Target TGT US | 2.06 | |
Dollarama DOL | 0.35 | Dollarama DOL | 0.35 | |
Amazon AMZN US | 0.00 | |||
Lowes LOW US | 1.44 | Lowes LOW US | 1.44 | |
Communication Services | Rogers B RCI.B | 3.64 | Rogers B RCI.B | 3.64 |
Comcast CMCSA US | 2.15 | Comcast CMCSA US | 2.15 | |
Telus T | 4.82 | Telus T | 4.82 | |
Shaw Commications SJR.B | 4.79 | Shaw Communications SJR.B | 4.79 | |
Facebook FB US | 0.00 | |||
VanEck Video Gaming ESPO US | 0.14 | |||
Alphabet GOOGL US | 0.00 | |||
Consumer Staples | Alimentation Couche- Tard ATD.B | 0.61 | Alimentation Couche Tard ATD.b | 0.61 |
Loblaws L | 1.80 | Loblaws L | 1.80 | |
Sysco SYY US | 3.11 | Sysco SYY US | 3.11 | |
Unilever PLC UL US | 3.15 | Unilever PLC UL US | 3.15 | |
Technology | Apple AAPL US | 0.74 | Apple AAPL US | 0.74 |
Microsoft MSFT US | 0.96 | Microsoft MSFT US | 0.96 | |
Open Text OTEX | 1.51 | Open Text OTEX | 1.51 | |
Paychex PAYX US | 3.38 | Paychex PAYX US | 3.38 | |
Logitech Int’l LOGI US ADR | 1.01 | Logitech Int’l LOGI US ADR | 1.01 | |
Qualcomm QCOM US | 2.40 | Qualcomm QCOM US | 2.40 | |
SPDR S&P Semi. ETF XSD US | 0.43 | SPDR S&P Semi ETF XSD US | 0.43 | |
CGI Inc. GIB.A | 0.00 | |||
ETFMG Prime Cyber Sec. HACK US | 1.31 | |||
Visa V US | 0.61 | |||
Utilities | Algonquin Power AQN | 4.60 | Algonquin Power AQN | 4.60 |
Capital Power CPX | 6.62 | Capital Power CPX | 6.62 | |
Northland Power NPI | 3.21 | Northland Power NPI | 3.21 | |
NextEra Energy NEE US | 1.95 | NextEra Energy NEE US | 1.95 | |
Fortis FTS | 3.55 | Fortis FTS | 3.55 | |
Healthcare | AbbVie ABBV US | 5.08 | AbbVie ABBV US | 5.08 |
Merck MRK US | 3.01 | Merck MRK US | 3.01 | |
United Healthcare UNH US | 1.58 | United Healthcare UNH US | 1.58 | |
CVS Healthcare CVS US | 3.08 | CVS Healthcare CVS US | 3.08 | |
Bristol Myers BMY US | 2.95 | Bristol Myers BMY US | 2.95 | |
Danaher DHR US | 0.35 | |||
Thermo Fisher Scientific TMO US | 0.21 | |||
Real Estate | Cdn Apt. REIT CAR.un | 2.88 | Cdn. Apt. REIT CAR.un | 2.88 |
CT Reit CRT.un | 5.68 | CT Reit CRT.un | 5.68 | |
InterRent REIT IIP.un | 2.27 | InterRent REIT IIP.un | 2.27 | |
Dream Industrial DIR.un | 6.22 | Dream Industrial DIR.un | 6.22 | |
Granite REIT GRT.un | 3.69 | Granite REIT GRT.un | 3.69 | |
Summit REIT SMU.un | 4.39 | Summit REIT SMU.un | 4.39 | |
European Equity | iShares MSCI Europe XEU | 2.45 | iShares MSCI Europe XEU | 2.45 |
Emerging Markets | BMO Emerging Markets ZEM | 2.37 | BMO Emerging Markets ZEM | 2.37 |
McMurtry Investment Report – Sector Weights (August 2020) | ||||
Equity Sector Weights (%) | ||||
Sector | My Weight | TSX Comp | S&P 500 | 55 % US /45% CDN |
Financials | 17.91 | 27.70 | 9.90 | 17.91 |
Energy | 6.78 | 12.00 | 2.50 | 6.78 |
Materials | 8.59 | 15.90 | 2.60 | 8.59 |
Industrials | 9.75 | 11.60 | 7.90 | 9.57 |
Consumer Disc. | 7.80 | 3.40 | 11.20 | 7.69 |
Comm. Services | 8.38 | 5.30 | 10.90 | 8.38 |
Consumer Staples | 5.79 | 4.30 | 7.00 | 5.79 |
Technology | 20.25 | 10.50 | 27.50 | 19.85 |
Utilities | 4.30 | 5.10 | 3.10 | 4.00 |
Real Estate | 1.72 | 3.10 | 2.80 | 2.94 |
Healthcare | 8.75 | 1.00 | 14.60 | 8.48 |
Totals | 100.00 | 99.90 | 100.00 | 99.96 |
McMurtry Investment Report Asset Mix August 2020) | ||
Asset Mix – Income and Growth Portfolios | ||
% | Income | Growth |
Cash | 30.00 | 30.00 |
Bonds – Reg. Bonds | 20.00 | 10.00 |
Bonds – High Yield | 0.00 | 0.00 |
Bonds – Tips | 0.00 | 0.00 |
Preferreds | 0.00 | 0.00 |
Equities | 50.00 | 60.00 |
CDN | 19.80 | 24.30 |
US | 24.20 | 29.70 |
Europe | 3.00 | 3.00 |
Emerging Markets | 3.00 | 3.00 |