McMurtry Investment Report Portfolios December 2024
Also available in PDF: McMurtry Investment Report – December 2024
Investment Commentary December 2024
US Yield Curve
The 10-2-year US Treasury yield curve closed on November 29th at a positive 0.05 %, down marginally from the October 30th level of 0.14%.
US Corporate Debt Spreads
As of November 26th, the Moody’s triple B yield relative to the 10-year Treasury decreased modestly by 8 basis points to 1.43%. This spread remains much lower than the 4.23% registered on March 20, 2020 when Covid started and its stability indicates the probability of a soft landing is intact.
China
The Chinese Caixin Manufacturing PMI rose to 51.5 in November, to the highest level in 5 months. Confidence rose to an 8- month high with more supportive government policies.
Equity Market Valuations
The forward PE of the S&P 500 remains at a relatively high level of 22 times as of the end of November.
US Corporate Earnings
Earnings growth for the S&P 500 companies remain strong. Year over year projected growth for the 4th quarter is 12% and increases to 12.7% for the 1st quarter of 2025. For calendar year 2025 the earnings growth rates increase to 15%.
Central Bank Monetary Policy
Jerome Powell is expected to reduce the Federal Reserve discount rate by 25 basis points this month. The Federal reserve remains data dependent but is expected to continue decreasing rates unless the rate of inflation starts going back up.
Asset Mix – Large Portfolios
I am increasing the equity weight by 5% for both portfolios and decreasing the cash weight accordingly. In addition, I am changing my North American benchmark weight from 65% US 35% Canada to 75% US 25% Canada. By definition, this benchmark change will materially increase US equities by reducing Canadian equities accordingly. It will also reduce the cyclical commodity exposure of the Energy and Materials sectors. Lastly, I am reducing the equity exposure to both Europe and Emerging Markets as their economies are very vulnerable to Trump’s punitive tariffs.
On the fixed income side, I am adding a 3% weight to the US real return US Treasury 0-5 years ETF, STIP-US. I am also adding a 3% weight to the US Treasury 3–7-year ETF, IEI-US.
Asset Mix- ETF Portfolios
Similar to the asset mix changes above, I am increasing the equity weight for both portfolios by 5% with a correspondingly reduction in cash of the same amount. I am also increasing my North American equity benchmark weight to 75% US 25% Canada from last month’s 65% US 35% Canada.
On the fixed income side, I am adding a 3% weight to the US real return US Treasury 0-5 years ETF, STIP-US. I am also adding a 3% weight to the US Treasury 3–7-year ETF, IEI-US.
Lastly, I am reducing both the Europe and Emerging market equity exposure.
Equity Sector Recommendations
Equity markets continue to broaden out away from solely Technology into more Value, Cyclicals, Small and Mid Cap areas. I expect this trend to continue and it implies the overall strength of the market.
The main changes I am making are the change in my North American benchmark weight to 75% US and 25% Canada and a reduction in the Materials sector from overweight last month to underweight this month. The global strength of the US dollar is a major headwind keeping commodity prices, especially copper at relatively low levels. The other major headwind is a weak Chinese economy keeping global demand at low levels. While gold has performed much better than copper over the last year, it has recently stalled out as a result of the strength of the US dollar and the election of a pro business leader.
Crude oil prices have suffered from a global supply glut that has forced OPEC to continue to curtail production just to stabilize prices at these low current levels.
I remain overweight Financials, Industrials, Consumer Discretionary and Reits. I remain underweight Energy, Consumer Staples, Utilities and Healthcare.
I remain market weight Technology, Communications and now Materials.
You will also notice how much the benchmark sector weights have changed from last month. This is principally a result of changing the North American benchmark weight favouring the US over Canada.
Individual Company Changes
In a blog dated November 29th, I added the US Industrial company, Flowserve, FLS-US, to both portfolios. The company is a global leader in the production and servicing of precision engineered flow control equipment such as pumps, valves and seals. The company also has just started receiving some revenues from the uranium industry and this is expected to climb sharply over the next several years. Flowserve is involved in the Energy, Water and Power Generation industries. The company is trading at a market multiple of 22.5 times, yet
is growing its EPS by a projected 28% this year and 21.5% next year.
In a blog dated November 26th, I deleted General Motors from both portfolios in the Consumer Discretionary sector. Should any of Trump’s punitive import tariffs be implemented without any exemptions, GM will end up paying much higher prices for their auto parts made in Mexico. In addition, Trump wants to get rid of any subsidies provided to the buyers of EV vehicles. This would be much more detrimental to GM and Ford than for Tesla that already has a far more advanced EV platform.
In a blog dated November 26th, I deleted CI Financial from both portfolios in the Financials sector. The company recently received a takeover by Abu Dhabi Sovereign Wealth Fund at $32 per share. Considering the shares are now trading within one dollar of the offering price, I recommend the sale of the stock at current prices to reduce any possible risk from the offer being rescinded for any reason.
In a blog dated November 20th, I added National Bank to both portfolios in the Financials sector. The bank is expected to be approved early next year to takeover Canadian Western Bank. This acquisition will broaden National’s reach to both Alberta and BC and increase its exposure to commercial lending. National’s recent quarter saw its EPS narrowly beating consensus estimates due to both higher revenues and a lower tax rate. However, there were higher provisions for credit losses which will need to be monitored. The bank raised its quarterly dividend and now yields 3.44%.
In a blog dated November 15th, I deleted TD Bank from both portfolios in the Financials sector. TD was fined $3.1 billion US for money laundering and a cap was placed on its expansion of the US retail operations in the US for a period of time. This cap puts TD at a real disadvantage at exactly the time when Trump’s deregulation policies will create more M&A activity.
In a blog dated November 11th, I added the iShares US Regional Bank ETF, IAT-US to both portfolios in the Financials sector. Less bank regulation means more M&A activity.
In a blog dated November 11th, I added Vanguard’s US Mid Cap Value ETF, VOE-US, to both portfolios in the Financials sector. Both small and mid cap stocks are expected to be a beneficiary of the broadening out of the equity market and are trading at lower valuations than the S&P 500’s heavily weighted market cap index.
In a blog dated November 10th, I deleted First Solar from the Growth portfolio in the Technology sector. Trump has indicated that he intends to eliminate subsidies to the purchasers of both solar panels and EV vehicles.
Lastly, in a blog dated November 5th, I added Wells Fargo to both portfolios in the Financials sector. Wells has finally moved on from its tarnished past and is now growing its loans and deposits at a comparable rate to the other US multinational banks like JP Morgan and Bank of America. Its current dividend yield is 2.15% and it its trading at a forward PE of 13.75 times, comparable to JP Morgan’s 13.57 times.
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