Also available in PDF: MIR Portfolios December 2020
Investment Commentary December 2020
US Yield Curve
Over the last month as of December 4th the ten year minus 2-year US Treasury yield curve jumped sharply from 64 basis points to the current 81 basis points. This level is relatively significant taking into account how low interest rates have been this year. This is a positive development for financial stocks and for the US economy.
US Corporate Debt Spreads
Moody’s Baa US corporate bond spread over 10 year US Treasuries narrowed to 2.23% on December 3rd from 2.58% last month and a high of 4.31% on March 23rd of this year. This is a positive sign of economic recovery.
US / China Trade Issues
Joe Biden and the Democrats are expected to be more conciliatory with China, although it is too early to tell at this point.
Covid – 19 Health Stats
The recent global spike with the colder weather is accelerating resulting in record daily new cases and deaths both in the US and globally. However, there is very good news on the horizon with two new vaccines about to receive approval and to be distributed throughout the world. Pfizer and Moderna are the two companies with vaccines that have very high rates of efficacy in excess of 90%. Most of the medical experts expect that these vaccines will be completely distributed to the world by the middle of next year or by the fall at the latest. There will obviously be some logistical problems getting everyone vaccinated, but hopefully the world is on its way to recovering from this terrible pandemic.
Equity Market Valuations
Taking into account the sharp rebound in the equity market since the US election and the positive vaccine announcements by Pfizer and Moderna, the Forward PE multiple of the S&P 500 remains historically high at 22.5 times.
US Domestic Economic Growth
The recent rebound in economic growth from the lows recorded during the height of the lockdowns is most definitely now levelling out as evidenced by the weaker than expected US November employment numbers. Edward Yardeni, a prominent US economist, expects 3rd quarter US GDP to rise by 15% but only by 5% in the 4th quarter. This is principally a result of the recent spike of new daily cases of the virus both in the US and globally.
US Federal Election
Despite all of Trump’s unsuccessful lawsuits alleging voter fraud, it is becoming clearer by the day that Joe Biden will become the next President of the US.
Central Bank Monetary Policy
Global central bank policies continue to be very accommodating.
I am maintaining the same asset mix as last month. Before the vaccines are widely distributed there will be additional localized lockdowns that will have a short term negative economic effect. However, I continue to recommend that any equity market weakness over the short term should be used as a buying opportunity. The bond market looks more vulnerable to me with rates unlikely to fall much further from current levels.
Equity Sector Weights
Equity markets are in the middle of an equity sector rotation out of defensive stocks into more cyclical ones. This makes sense with the economy rebounding and with positive news on the vaccine front. While I continue to favour a barbell approach having exposure to all sectors, you will notice my recent purchase recommendations are principally in the cyclical areas. When considering cyclical sectors and companies, it is still very important that you focus on companies that have strong balance sheets and encouraging earnings, revenues and cash flow prospects. As an example, my preference is for auto parts companies that have solid current prospects as opposed to blindly investing in airline and cruise ships at this point that have limited positive outlooks until the vaccines are widely distributed.
Taking into account the improving Chinese economy, I am becoming more favourably inclined towards the base metal industry, in particular copper. In this month’s newsletter, I am keeping the Materials sector at the same equity sector market weight exposure as last month. However, I am significantly increasing my exposure to both silver and base metals while simultaneously reducing my gold weight. In addition, you will notice a change in my 55% US 45% US/ Canada North American benchmark weight to an even 50% for each country. This change is as a result of the global economic rebound that is expected commencing the middle of next year.
I am increasing my Energy exposure to market weight. OPEC’s recent 500,000 barrels per day increase in production was not nearly as bad as what could have resulted from these talks. A rebounding economy will surely help crude oil demand, but it is still critical to closely monitor US shale production. Recently it has fallen sharply but the recent spike in crude prices may reverse this trend somewhat.
I am reducing the Utility exposure to market weight from overweight last month.
I am also reducing the Communications sector weight from market to underweight.
For all the other groups I am maintaining the same weights as last month.
Individual Equity Changes
In a portfolio blog on November 16th, I added Fiserv, the US fintech company to the Growth portfolio. Last year’s acquisition of First Data has made Fiserv into one of the largest operators of both debit and credit payment devices to merchants. This business combined with its other electronic payments and loan processing businesses for US banks provides the company with strong growth prospects.
In a portfolio blog on November 27th I added Bank of Nova Scotia to both portfolios. The bank has lagged its domestic peers over the last few years and will likely play catchup with a global economic rebound and stronger commodity prices. Scotia has a large international presence especially in Latin America. Higher commodity prices will most definitely help this region.
In a portfolio blog on November 23rd I added Gentex, the US auto parts company that specializes in auto dimming technology for both rear and side view mirrors. Gentex is expected to be a beneficiary from the improving global auto industry that is underway at this moment.
In this month’s newsletter, I added Capstone Mining to the Growth portfolio. This company has strong growth prospects in the production of copper and is attractively priced compared to many of its peers.
I also added Pan American Silver to both portfolios. This Canadian mining company is one of the largest silver producers globally and is expected to be a beneficiary from the increase in silver demand from both solar panels, new 5G networks and the electrification of autos.
I deleted the Canadian gold company ETF, XGD from the Growth portfolio while keeping the US GDX ETF that has many of the same holdings.
Lastly, I deleted the US GLD gold bullion ETF from the Growth portfolio as I prefer exposure to the actual gold mining companies rather than to gold commodity itself.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (December 2020)|
|Cash||Alterna Bank – High Interest Savings (1.20% current )||Alterna Bank – High Interest Savings (1.20% current)|
|EQ Bank – Savings Plus ( 1.50% current)||EQ Bank – Savings Plus ( 1.50% 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|
|Bonds -High Yield||iShares XHY.TO US High Yield Cdn. $||iShares XHY.To US High Yield Cdn $|
|Common Stocks||Security||Dividend Yield %||Security||Dividend Yield %|
|Financials||Royal Bank RY||4.11||Royal Bank RY||4.11|
|Intact Financial IFC||2.12||Intact Financial IFC||2.12|
|Bank of Nova Scotia BNS||5.33||Bank of Nova Scotia BNS||5.33|
|Brookfield Asset MGT. BAM.A||1.15||Brookfield Asset MGT. BAM.A||1.15|
|TD TD||4.46||TD TD||4.46|
|Fiserv FISV US||0.00|
|Sun Life SLF||3.85||Sun Life SLF||3.85|
|JP Morgan JPM US||2.94||JP Morgan JPM US||2.94|
|Manulife Fin’l MFC||4.81||Manulife Fin’l MFC||4.81|
|Bank of America BAC US||2.46||Bank of America BAC US||2.46|
|Morgan Stanley MS US||2.15||Morgan Stanley MS US||2.15|
|T. Rowe Price TROW US||2.36||T. Rowe Price TROW US||2.36|
|Allstate ALL US||2.07||Allstate ALL US||2.07|
|Energy||Suncor SU||3.66||Suncor SU||3.66|
|Canadian Natural Resources CNQ||5.29||Canadian Natural Resources CNQ||5.29|
|Freehold FRU||4.62||Freehold FRU||4.62|
|Enbridge ENB||7.60||Enbridge ENB||7.60|
|TC Energy TRP||5.50||TC Energy TRP||5.50|
|Whitecap Resources WCP||4.04||Whitecap Resources WXP||4.04|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||2.07||Agnico Eagle AEM||2.07|
|Air Products APD US||1.96||Air Products APD US||1.96|
|Pan American Silver PAAS||0.93||Pan American Silver PAAS||0.93|
|Capstone Mining CS||0.00|
|Barrick Gold ABX||1.56||Barrick Gold ABX||1.56|
|Franco Nevada FNV||0.81||Franco Nevada FNV||0.81|
|VanEck Vectors Gold ETF GDX US||0.54||VanEck Vectors Gold ETF GDX US||0.54|
|BMO Global Base Metals ETF ZMT||2.07||BMO Global Base Metals ETF ZMT||2.07|
|Osisko Metals OM.V||0.00|
|Industrials||Toromont TIH||1.36||Toromont TIH||1.36|
|3M Co MMM US||3.41||3M Co MMM US||3.41|
|WSP Global WSP||1.31||WSP Global WSP||1.31|
|Canadian Pacific CP||0.89||Canadian Pacific CP||0.89|
|Raytheon Technologies RTX US||2.57||Raytheon Technologies RTX US||2.57|
|Stantec STN||1.51||Stantec STN||1.51|
|Aecon Group ARE||3.85||Aecon Group ARE||3.85|
|Honeywell HON US||1.75||Honeywell HON US||1.75|
|TFI Int’l TFII||1.56||TFI Int’l TFII||1.56|
|Consumer Discretionary||Home Depot HD US||2.27||Home Depot HD US||2.27|
|Martinrea International MRE||1.29||Martinrea International MRE||1.29|
|Gentex GNTX US||1.42||Gentex GNTX US||1.42|
|Target TGT US||1.55||Target TGT US||1.55|
|Dollarama DOL||0.33||Dollarama DOL||0.33|
|Amazon AMZN US||0.00|
|Lowes LOW US||1.60||Lowes LOW US||1.60|
|Communication Services||Rogers B RCI.B||3.27||Rogers B RCI.B||3.27|
|Activision Blizzard ATVI US||0.51||Activision Blizzard ATVI US||0.51|
|Comcast CMCSA US||1.78||Comcast CMCSA US||1.78|
|Telus T||4.89||Telus T||4.89|
|Shaw Commications SJR.B||5.12||Shaw Communications SJR.B||5.12|
|Facebook FB US||0.00|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.79||Alimentation Couche Tard ATD.b||0.79|
|Loblaws L||2.11||Loblaws L||2.11|
|Sysco SYY US||2.30||Sysco SYY US||2.30|
|General Mills GIS US||3.38||General Mills GIS US||3.38|
|Unilever PLC UL US||3.31||Unilever PLC UL US||3.31|
|Technology||Apple AAPL US||0.67||Apple AAPL US||0.67|
|Microsoft MSFT US||1.04||Microsoft MSFT US||1.04|
|Open Text OTEX||1.77||Open Text OTEX||1.77|
|Paychex PAYX US||2.63||Paychex PAYX US||2.63|
|Qualcomm QCOM US||1.65||Qualcomm QCOM US||1.65|
|SPDR S&P Semi. ETF XSD US||0.30||SPDR S&P Semi ETF XSD US||0.30|
|CGI Inc. GIB.A||0.00|
|ETFMG Prime Cyber Sec. HACK US||1.22|
|Visa V US||0.60|
|Keysight KEYS US||0.00|
|Utilities||Algonquin Power AQN||3.95||Algonquin Power AQN||3.95|
|Capital Power CPX||5.78||Capital Power CPX||5.78|
|Northland Power NPI||2.73||Northland Power NPI||2.73|
|NextEra Energy NEE US||1.93||NextEra Energy NEE US||1.93|
|Fortis FTS||3.86||Fortis FTS||3.86|
|Healthcare||AbbVie ABBV US||4.85||AbbVie ABBV US||4.85|
|Merck MRK US||3.17||Merck MRK US||3.17|
|United Healthcare UNH US||1.43||United Healthcare UNH US||1.43|
|CVS Healthcare CVS US||2.68||CVS Healthcare CVS US||2.68|
|Bristol Myers BMY US||2.89||Bristol Myers BMY US||2.89|
|Danaher DHR US||0.32|
|Thermo Fisher Scientific TMO US||0.19|
|Perkin Elmer PKI US||0.20|
|Real Estate||Cdn Apt. REIT CAR.un||2.74||Cdn. Apt. REIT CAR.un||2.74|
|CT Reit CRT.un||5.30||CT Reit CRT.un||5.30|
|Minto Apartment Reit MI.un||2.37||Minto Apartment Reit MI.un||2.37|
|Dream Industrial DIR.un||5.44||Dream Industrial DIR.un||5.44|
|Granite REIT GRT.un||3.86||Granite REIT GRT.un||3.86|
|Summit Industrial REIT SMU.un||4.14||Summit Industrial REIT SMU.un||4.14|
|European Equity||iShares MSCI Europe XEU||2.27||iShares MSCI Europe XEU||2.27|
|Emerging Markets||BMO Emerging Markets ZEM||2.14||BMO Emerging Markets ZEM||2.14|
|McMurtry Investment Report – Sector Weights (December 2020)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||50% US /50% CDN|
|McMurtry Invest. Report Asset Mix December 2020)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Reg. Bonds||20.00||10.00|
|Bonds – High Yield||5.00||5.00|
|Bonds – Tips||0.00||0.00|