Also available in PDF: MIR Portfolios July 2020
Investment Commentary July 2020
US Yield Curve
The 10 minus 2 year US Treasury yield curve tightened to 59 basis points from 69 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 tightening has no immediate repercussions.
US Corporate Debt Spreads
The current US investment grade spread over US Treasuries tightened slightly from last month. This compares favourably to the 4.5% spread during the last recession of 2007-2008. 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 rearing their ugly head once more. 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, the daily new cases seem to be escalating. This is most likely a result of the gradual ending of the lockdowns. The only positive development is that the number of daily deaths continues to decline. There have been several states including Florida and Texas where the number of cases is sharply rising. Many people are simply not wearing masks and are relying far too much on the guidance of this current President.
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
While US corporate profit growth remains depressed, the recent monthly domestic economic statistics point to a material improvement in activity.
Global Economic Recession
Globally the world remains in a recession. However, the gradual ending of lockdowns is resulting in an improved US domestic economy with both China and Europe rebounding from a low base.
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.
I am reducing my cash position by 5% for both portfolios and redeploying the cash back into equities. More specifically I am adding a 3% weight into Bank of Montreal’s Emerging Market ETF, ZEM that trades in Canadian dollars. While there remain a lot of headwinds, the probability of a suitable vaccine to stop this pandemic is looking more likely within the next six months or even earlier. In addition, there are several anti-viral medications that could conceivably be approved shortly to stop the progression of this virus. Overall economic activity is showing signs of real improvement albeit from a very depressed level.
Equity Sector Weights
The major change from last month is that I am increasing my exposure in the Consumer Discretionary sector to overweight from market weight previously. However, my stock selection in this area remains very focused.
For the Technology, Industrials, Utilities and Healthcare I remain overweight my North American benchmark.
For the Financials, Energy, Materials, Communications and Consumer Staples I remain market weight.
I remain underweight the REIT sector.
I am adding Dollarama, the Canadian discount retailer to the Growth portfolio. The company’s stores are considered an essential service and the last quarterly report saw much better than expected revenues. In this difficult economic period where other retailers are having difficulty paying their rents, Dollarama is in a strong position to take on new rentals at more attractive prices. This company exhibits both cyclicality and long- term secular growth in its overall business. The company is expected to report strong growth over the next few years with is aggressive plan for new store openings to go along with its organic growth.
I am adding Granite Reit to both portfolios. This Canadian industrial Reit has a strong balance sheet and a very solid major tenant, Magna International. The company has operations both in North America and in Europe. While this Reit trades at a premium to its peers, it very much deserves this valuation with its rock-solid dividend and strong growth in operating cash flow.
In one of last month’s blog, I recommended switching out of Becton Dickinson into AbbVie in the Healthcare sector. AbbVie is exhibiting much better growth than Becton and is benefitting from its recent acquisition of Allergan late last year.
Finally, I am adding exposure to Emerging Markets in both portfolios through Bank of Montreal’s ZEM ETF.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (July 2020)|
|Cash||Alterna Bank – High Interest Savings (1.69% current )||Alterna Bank – High Interest Savings (1.69% current)|
|EQ Bank – Savings Plus ( 2.00% current)||EQ Bank – Savings Plus ( 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||4.69||Royal Bank RY||4.69|
|Bank of Nova Scotia BNS||6.41||Bank of Nova Scotia BNS||6.41|
|Fiera Capital FSZ||8.84||Fiera Capital FSZ||8.84|
|Intact Financial IFC||2.57||Intact Financial IFC||2.57|
|TD TD||5.22||TD TD||5.22|
|Sun Life SLF||4.41||Sun Life SLF||4.41|
|JP Morgan JPM US||3.86||JP Morgan JPM US||3.86|
|Manulife Fin’l MFC||6.06||Manulife Fin’l MFC||6.06|
|Bank of America BAC US||3.10||Bank of America BAC US||3.10|
|Morgan Stanley MS US||2.94||Morgan Stanley MS US||2.94|
|T. Rowe Price TROW US||2.94||T. Rowe Price TROW US||2.94|
|Allstate ALL US||2.26||Allstate ALL US||2.26|
|Energy||Suncor SU||3.67||Suncor SU||3.67|
|Canadian Natural Resources CNQ||7.22||Canadian Natural Resources CNQ||7.22|
|Freehold FRU||5.11||Freehold FRU||5.11|
|Enbridge ENB||7.85||Enbridge ENB||7.85|
|TC Energy TRP||5.59||TC Energy TRP||5.59|
|Whitecap Resources WCP||7.67||Whitecap Resources WXP||7.67|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.22||Agnico Eagle AEM||1.22|
|Franco Nevada FNV||0.75||Franco Nevada FNV||0.75|
|VanEck Vectors Gold ETF GDX US||0.53||VanEck Vectors Gold ETF GDX US||0.53|
|SPDR Gold Bullion GLD US||0.00|
|BMO Global Base Metals ETF ZMT||3.07||BMO Global Base Metals ETF ZMT||3.07|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.15|
|Industrials||Toromont TIH||1.84||Toromont TIH||1.84|
|Air Products APD US||2.20||Air Products APD US||2.20|
|WSP Global WSP||1.80||WSP Global WSP||1.80|
|Raytheon Technologies RTX US||3.08||Raytheon Technologies RTX US||3.08|
|Stantec STN||1.48||Stantec STN||1.48|
|Aecon Group ARE||4.34||Aecon Group ARE||4.34|
|Honeywell HON US||2.50||Honeywell HON US||2.50|
|TFI Int’l TFII||2.16||TFI Int’l TFII||2.16|
|Consumer Discretionary||Home Depot HD US||2.42||Home Depot HD US||2.42|
|Target TGT US||2.29||Target TGT US||2.29|
|Restaurant Brands Int’l QSR||3.82||Restaurant Brands Int’l QSR||3.82|
|Amazon AMZN US||0.00|
|Lowes LOW US||1.68||Lowes LOW US||1.62|
|Communication Services||Rogers B RCI.B||3.67||Rogers B RCI.B||3.67|
|Comcast CMCSA US||2.32||Comcast CMCSA US||2.32|
|Telus T||5.12||Telus T||5.12|
|Shaw Commications SJR.B||5.35||Shaw Communications SJR.B||5.35|
|Facebook FB US||0.00|
|VanEck Video Gaming ESPO US||0.16|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.60||Alimentation Couche Tard ATD.b||0.60|
|Loblaws L||1.91||Loblaws L||1.91|
|Sysco SYY US||3.35||Sysco SYY US||3.35|
|Unilever PLC UL US||3.23||Unilever PLC UL US||3.23|
|Technology||Apple AAPL US||0.90||Apple AAPL US||0.90|
|Microsoft MSFT US||1.00||Microsoft MSFT US||1.00|
|Open Text OTEX||1.65||Open Text OTEX||1.65|
|Paychex PAYX US||3.25||Paychex PAYX US||3.25|
|Logitech Int’l LOGI US ADR||1.15||Logitech Int’l LOGI US ADR||1.15|
|Qualcomm QCOM US||2.90||Qualcomm QCOM US||2.90|
|Intel INTC||2.24||Intel INTC||2.24|
|CGI Inc. GIB.A||0.00|
|ETFMG Prime Cyber Sec. HACK US||1.42|
|Visa V US||0.62|
|Utilities||Algonquin Power AQN||4.84||Algonquin Power AQN||4.84|
|Northland Power NPI||3.53||Northland Power NPI||3.53|
|NextEra Energy NEE US||2.27||NextEra Energy NEE US||2.27|
|Fortis FTS||3.70||Fortis FTS||3.70|
|Healthcare||AbbVie ABBV US||3.70||AbbVie ABBV US||3.70|
|Merck MRK US||3.12||Merck MRK US||3.12|
|United Healthcare UNH US||1.68||United Healthcare UNH US||1.68|
|CVS Healthcare CVS US||3.10||CVS Healthcare CVS US||3.10|
|Bristol Myers BMY US||3.03||Bristol Myers BMY US||3.03|
|Danaher DHR US||0.41|
|Thermo Fisher Scientific TMO US||0.24|
|Real Estate||Cdn Apt. REIT CAR.un||2.84||Cdn. Apt. REIT CAR.un||2.84|
|CT Reit CRT.un||5.80||CT Reit CRT.un||5.80|
|InterRent REIT IIP.un||2.16||InterRent REIT IIP.un||2.16|
|Dream Industrial DIR.un||6.55||Dream Industrial DIR.un||6.55|
|Granite REIT GRT.un||4.15||Granite REIT GRT.un||4.15|
|Summit REIT SMU.un||4.72||Summit REIT SMU.un||4.72|
|European Equity||iShares MSCI Europe XEU||2.52||iShares MSCI Europe XEU||2.52|
|Emerging Markets||BMO Emerging Markets ZEM||2.48||BMO Emerging Markets ZEM||2.48|
|McMurtry Investment Report – Sector Weights (July 2020)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix July 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|