McMurtry Investment Report Portfolios – July 2020

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.

Asset Mix

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.

Individual Positions

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
Financial Writer
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (July 2020)

	Income		Growth
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
	CNR	1.91	CNR	1.91
	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
			Dollarama DOL	0.39
			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
Financials	18.56	28.90	10.10	18.56
Energy	7.12	12.40	2.80	7.12
Materials	7.99	14.70	2.50	7.99
Industrials	9.75	11.50	8.00	9.58
Consumer Disc.	7.65	3.40	10.80	7.47
Comm. Services	8.10	5.40	10.80	8.10
Consumer Staples	5.79	4.30	7.00	5.79
Technology	20.35	10.30	27.50	19.76
Utilities	4.35	5.00	3.10	3.96
Real Estate	1.50	3.10	2.80	2.94
Healthcare	8.85	1.10	14.60	8.53
Totals	100.00	100.10	100.00	99.78

McMurtry Investment Report Asset Mix July 2020)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	30.00	30.00
Bonds – Regular	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

Also available in PDF: MIR Portfolios April 2019

Investment Commentary (April 2019)

Asset Mix Changes

Last week both the Canadian and US yield curve inverted where short rates exceeded longer maturities. For most of the past economic recessions, an inverted yield curve occurred 6-18 months before the onslaught of an economic slowdown. Consequently, this signal should not be taken lightly and brushed off as is frequently the case with economists stating that things are different this time.

This week the inversion of the curve went away in both Canada and the US with longer rates now slightly exceeding shorter maturities. However, the negative yield curve is still present in Europe where their economy continues to suffer.

US corporate bond spreads for both investment and High Yield securities had been creeping up in late December. However, year to date corporate spreads over US Treasuries have been coming down once again. Historically when corporate spreads widen this is a danger signal for an economic slowdown. The recent reduction is spreads is a positive sign that the economy may not be as weak as many pundits are saying.

Overall economic activity is definitely slowing globally. This is also true in the US but their economy is still growing on a relative basis much faster than Europe and Canada. Economic growth in the Chinese economy had been coming down sharply, but this week an announcement came out stating that their domestic industrial production started to revive after nearly nine months of decline. Several months ago the Chinese authorities began stimulating their domestic economy by lowering corporate taxes and increasing government spending. Once again this is a positive development.

The Federal Reserve has stopped increasing rates by emphatically stating that there will be no more rate increases for the remainder of the year.

US corporate profit growth has slowed dramatically from last year, while equity prices have rebounded sharply year to date. Equity valuations are no longer cheap as they were in late December.

This week the US / China trade talks have taken a more positive tone which is good for markets.

Taking all these factors into consideration, I have decided to leave the asset mix for both portfolios the same as last month. The jury is still out if an economic recession is imminent or only years away.

McMurtry Investment Report Asset Mix (April 2019)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	35.00	30.00
Bonds – Regular	20.00	10.00
Bonds – High Yield	5.00	5.00
Preferreds	0.00	0.00
Equities	40.00	55.00
CDN	15.75	22.50
US	19.25	27.50
Europe	5.00	5.00
Emerging Markets	0.00	0.00

Equity Sectors

The main change to my equity sector recommendations is to reduce the Financial equity exposure from overweight to market weight the 55% US 45% Canada benchmark. This works out to a new weight of 21.25% of my North American equity exposure.

The reason for my reduction in weight for the Financial sector is all to do with interest rates and the slope of the yield curve. Lower rates combined with either a flat or inverted yield curve is not positive for the bank’s net interest margins. A slowing economy normally results in an increase in loan losses, another possible headwind.

For the other groups I remain market weight Energy, Utilities and Healthcare.

I remain overweight Technology, Industrials, Real Estate, Communication Services and Consumer Staples

I remain underweight Materials and Consumer Discretionary.

McMurtry Investment Report – Sector Weights (April 2019)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.25	31.70	12.70	21.25
Energy	11.07	18.00	5.40	11.07
Materials	5.66	11.20	2.60	6.47
Industrials	10.40	10.90	9.50	10.13
Consumer Disc.	6.40	4.10	10.10	7.40
Comm. Services	8.50	5.80	10.10	8.17
Consumer Staples	6.25	3.90	7.30	5.77
Technology	14.00	4.50	21.20	13.69
Utilities	3.71	4.20	3.30	3.71
Real Estate	3.75	3.50	3.10	3.28
Healthcare	9.02	2.20	14.60	9.02
Totals	100.00	100.00	99.90	99.95

Common Equity Changes

In the Financial Services sector, I am replacing National Bank with Intact Financial for both portfolios. Intact is the largest property / casualty company in Canada and will benefit from the recent departure of AIG, a large US competitor from the Canadian market. Intact is raising insurance rates in Ontario and this will help to increase operating margins. Differing from life insurance companies, property and casualty insurance companies have much shorter term liabilities and are consequently not as negatively affected from flat to falling interest rates as the life companies are.

In the Technology sector, I am deleting Nokia from both portfolios. Huawei, the Chinese company and major competitor to Nokia has been continuously lobbying the global wireless providers to encourage them to continue buying their products. It is only in the US that the Chinese company has been banned with its alleged cybersecurity activities. Thus, Nokia has not been as much of a beneficiary from the 5G wireless ramp up as originally expected. In addition, a law firm has recently alleged that Nokia’s Alcatel – Lucent division has some very serious potential claims for security law violations. This creates a lot of uncertainty. My recommendation is to sell your Nokia shares and use the proceeds to purchase more Cisco, which will be a major beneficiary from the upcoming 5G implementation.

In the healthcare sector I am adding the Swiss dental implant company, Straumann Holdings ADR to my Growth portfolio. This American Depositary Receipt is not very liquid in the US market, so please always use limit orders when buying and selling this security. Despite this shortfall, this is a good quality company and one of the global leaders in the dental implant industry. The company is experiencing strong annual revenue and gross profit growth in addition to record EBITDA margins. The company has strong organic growth and operates in 100 countries globally. The global dental implant market is expected to grow at 4-5% globally this year and Straumann’s organic growth is sharply outperforming its competitors.

Lastly in the Materials sector, I am adding Osisko Metals to my Growth portfolio. The company is a small cap zinc exploration company that operates in both the Far North and in New Brunswick. The company has no long term debt and the level of insider buying is unusually high. Normally I do not even discuss insider buying, but the level of insider buying for this company is extraordinary. The supply / demand situation for zinc is the most favourable for all the base metals with inventory stockpiles at very low levels. Should the Chinese economy rebound the demand for zinc will increase accordingly.

McMurtry Investment Report – Portfolios (April 2019)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.35% current rate)		Alterna Bank – High Interest Savings (2.35% current rate)
	EQ Bank – High Interest Savings ( 2.30% current rate)		EQ Bank – High Interest Savings ( 2.30% current rate)
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 CORP	iShares XHY US High Yield CDN$		iShares XHY US High Yield CDN $
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.05	Royal Bank RY	4.05
	Bank of Montreal BMO	4.00	Bank of Montreal BMO	4.00
	Bank of Nova Scotia BNS	4.89	Bank of Nova Scotia BNS	4.89
	Intact Financial IFC	2.69	Intact Financial IFC	2.69
	TD TD	4.08	TD TD	4.08
	Sun Life SLF	3.90	Sun Life SLF	3.90
	JP Morgan JPM US	3.16	JP Morgan JPM US	3.16
	Bank of America BAC US	2.17	Bank of America BAC US	2.17
	Citibank C US	2.89	Citibank C US	2.89
	Morgan Stanley MS US	2.84	Morgan Stanley MS US	2.84
	T. Rowe Price TROW US	3.04	T. Rowe Price TROW US	3.04
	Keycorp KEY US	4.32	Keycorp KEY US	4.32
	PNC Fin’l PNC US	3.10	PNC Fin’l PNC US	3.10
Energy	Suncor SU	3.85	Suncor SU	3.85
	Freehold FRU	7.43	Freehold FRU	7.43
	Torc TOG	5.62	Torc TOG	5.62
	Pembina Pipe Lines PPL	4.55	Pembina Pipe Lines PPL	4.55
	Enbridge ENB	6.04	Enbridge ENB	6.04
	Trans Canada TRP	4.91	Trans Canada TRP	4.91
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.15	Agnico Eagle AEM	1.15
	Franco Nevada FNV	1.29	Franco Nevada FNV	1.29
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.20
Industrials	Toromont TIH	1.55	Toromont TIH	1.55
	Air Products APD US	2.44	Air Products APD US	2.44
	WSP Global WSP	2.06	WSP Global WSP	2.06
	Canadian Pacific CP	0.94	Canadian Pacific CP	0.94
	CNR	1.79	CNR	1.79
	Raytheon RTN US	2.03	Raytheon RTN US	2.03
	Aecon Group ARE	3.33	Aecon Group ARE	3.33
	Guggenheim Eq WT IND RGI US	1.35	Guggenheim Eq Wt IND RGI US	1.35
	Honeywell HON US	2.07	Honeywell HON US	2.07
	TFI Int’l TFII	2.45	TFI Int’l TFII	2.45
Consumer Discretionary	Home Depot HD US	2.80	Home Depot HD US	2.80
	Sleep Canada ZZZ	3.77	Sleep Canada ZZZ	3.77
	Canadian Tire CTC.A	2.88	Canadian Tire CTC.A	2.88
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Lowes LOW US	1.75	Lowes LOW US	1.75
Communication Services	Rogers B RCI.B	2.78	Rogers B RCI.B	2.78
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.64	Alimentation Couche Tard ATD.b	0.64
	Loblaws L	1.79	Loblaws L	1.79
	Constellation Brands STZ US	1.69	Constellation Brands STZ US	1.69
	Unilever PLC UL US	3.06	Unilever PLC UL US	3.06
Technology	Apple AAPL US	1.54	Apple AAPL US	1.54
	Microsoft MSFT US	1.56	Microsoft MSFT US	1.56
	Open Text OTEX	1.58	Open Text OTEX	1.58
	Paychex PAYX US	2.79	Paychex PAYX US	2.79
	Cisco CSCO US	2.59	Cisco CSCO US	2.59
			Kinaxis KXS	0.00
			ETFMG Prime Cyber Sec. HACK US	0.15
			Visa V US	0.64
Utilities	Algonquin Power AQN	4.58	Algonquin Power AQN	4.58
	Northland Power NPI	5.12	Northland Power NPI	5.12
	Fortis FTS	3.64	Fortis FTS	3.64
Healthcare	Abbott Labs ABT US	1.60	Abbott Labs ABT US	1.60
	Becton Dickinson BDX US	1.23	Becton Dickinson BDX US	1.23
	Merck MRK US	2.65	Merck MRK US	2.65
	US Healthcare iShares ETF IYH US	1.84	US Healthcare iShares ETF IYH US	1.84
	United Healthcare UNH US	1.46	United Healthcare UNH US	1.46
			Danaher DHR US	0.52
			Thermo Fisher Scientific TMO US	0.28
			Straumann ADR SAUHY US *	0.63
			IBB Biotech ETF IBB US	0.28
Real Estate	Cdn Apt. REIT CAR.un	2.76	Cdn. Apt. REIT CAR.un	2.76
	InterRent REIT IIP.un	2.03	InterRent REIT IIP.un	2.03
	Dream Industrial DIR.un	5.83	Dream Industrial DIR.un	5.83
	Summit REIT SMU.un	4.35	Summit REIT SMU.un	4.35
European Equity	iShares MSCI Europe XEU	2.96	iShares MSCI Europe XEU	2.96

* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.

McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Portfolios – July 2020

Investment Commentary July 2020

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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