McMurtry Investment Report Portfolios – June 2020

Also available in PDF: MIR Portfolios June 2020

Investment Commentary June 2020

The movement of cash back into equities was quite remarkable after the recent market meltdown. The fear of being left behind appears to be one of the driving forces propelling investors back into the market.

US Yield Curve

The 10 minus 2 year US Treasury yield curve has risen from zero recently to 69 basis points. 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 rise is a bullish sign for the economy.

US Corporate Debt Spreads

The current US investment grade spread over US Treasuries is the same as last month at 2.2%. This compares to the 4.5% spread during the last recession of 2007-2008. Once again, this recent narrowing of the spread is bullish for the economy but may be the result of the recent Federal Reserve buying of high yield debt.

US / China Trade Issues

While these issues are ongoing, Trump has a lot more to worry about than the trade war.

Covid – 19 Health and Economic Implications

The number of daily new cases globally and in the US remains at high levels and this is a real concern. On the other hand, the number of daily deaths globally and in the US is easing off. Taking into consideration the relaxation of lockdown restrictions, this may well lead to a second wave of the pandemic this fall when the colder weather arrives and the population goes indoors once again.

Equity Market Valuations

The forward PE of the S&P 500 index is at 22 times this year’s earnings, a historically high level. This is not a good development as the equity market is no longer cheap.

US Corporate Profit Growth

US corporate profit growth remains weak but the recent unexpected improvement in employment numbers is a positive sign.

Global Economic Recession

Globally all countries remain in a recession. However, the stock market is expecting a V-shaped economic recovery which may be unrealistic.

Central Bank Monetary Policy

The recent strength in the US equity market combined with better than anticipated monthly employment numbers may lead the Federal Reserve to be a little less accommodative. This is a potential headwind for both the equity and fixed income markets.

Global Fiscal Policy Measures

All countries remain fully committed to stimulating their domestic economies through both fiscal and monetary measures.

Asset Mix

My current high cash position in both portfolios of 35% is to provide a safety cushion in case of a market selloff. This applies to the fixed income component as well as the equity one. Interest rates are so low today that they are likely to gradually go up over time. This is not a good development for the bond market. I am maintaining the same cash levels and asset mixes as last month. The high valuations for both equities and fixed income and the real possibility of a second wave of the virus in the fall make me cautious at this time. In addition, the domestic civil unrest and the dictator like reaction by Trump make me quite uneasy given how far equity prices have rebounded. I doubt the equity market will retest their recent lows. However, having some cash available gives investors an opportunity to add to their equity positions on market dips.

Equity Sector Weights

On June 2nd I posted a portfolio blog recommending an increase in the Financial Services equity weight to my benchmark 55% US 45% Canada market weight of 18.59% from my underweight position last month. This call is a way to participate in the cyclical pickup in the economy with the banks’ loan loss provisions most likely peaking and then gradually going down in 2021.

I am maintaining my overweight in Technology, Healthcare, Industrials and Utilities.

I am maintaining my market weight in Energy, Materials, Consumer Discretionary, Consumer Staples and Communications. Lastly, I am maintaining my underweight in Reits.

Individual Positions

On May 19th I posted a portfolio blog where I added Fiera Capital to both portfolios. The Montreal based money manager has $167 billion under management and pays an attractive dividend of 8.49%.

Recently I added Bank of Nova Scotia to both portfolios. The bank offers a nice 5.95% dividend yield that is well covered. Its recent quarter saw a sharp rise in loan loss provisions that will gradually decrease as the economy recovers.

I recently added Intel, the US semiconductor company to both portfolios in the Technology sector. Through its recent acquisition of Mobileye, the company has an opportunity to participate in the artificial intelligence end of the automobile industry. Intel also owns datacenters that are seeing strong growth. Its basic microchip business is expected to pick up with a stronger economy.

Lastly, I want to reiterate my current buy recommendation on Osisko Metals for the Growth portfolio. The combination of very strong insider buying by the CEO with the fact that the company’s Pine Point Mines remains one of the world’s largest close to surface lead / zinc deposits, are important factors to consider. Its ore grade is also solid and its concentrate has very few impurities, something that Chinese buyers require. Currently the company is conducting an exploration program underground hoping to increase the size of the ore body. At current zinc prices the mine is not economic on a cash flow basis. The Chinese are the largest global buyers of zinc and consequently the demand for zinc is expected to rebound with a pickup in the Chinese economy. As this is a speculative play that may take several years to work out, I recommend an equity position of no more than 1% of the total equity weight.

Peter McMurtry, B.Com, CFA
Financial Writer
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https://mcmurtryinvestmentreport.ca

McMurtry Investment Report – Portfolios (June 2020)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.00% current )		Alterna Bank – High Interest Savings (2.00% current)
	EQ Bank – High Interest Savings ( 2.00% current)		EQ Bank – High Interest Savings ( 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	4.46	Royal Bank RY	4.46
	Bank of Nova Scotia BNS	5.95	Bank of Nova Scotia BNS	5.95
	Fiera Capital FSZ	8.49	Fiera Capital FSZ	8.49
	Intact Financial IFC	2.48	Intact Financial IFC	2.48
	TD TD	4.86	TD TD	4.86
	Sun Life SLF	4.17	Sun Life SLF	4.17
	JP Morgan JPM US	3.24	JP Morgan JPM US	3.24
	Manulife Fin’l MFC	5.74	Manulife Fin’l MFC	5.74
	Bank of America BAC US	2.56	Bank of America BAC US	2.56
	Morgan Stanley MS US	2.83	Morgan Stanley MS US	2.83
	T. Rowe Price TROW US	2.81	T. Rowe Price TROW US	2.81
	Allstate ALL US	2.05	Allstate ALL US	2.05
Energy	Suncor SU	2.94	Suncor SU	2.94
	Canadian Natural Resources CNQ	5.89	Canadian Natural Resources CNQ	5.89
	Freehold FRU	4.29	Freehold FRU	4.29
	Enbridge ENB	7.23	Enbridge ENB	7.23
	TC Energy TRP	5.13	TC Energy TRP	5.13
	Whitecap Resources WCP	6.36	Whitecap Resources WXP	6.36
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.36	Agnico Eagle AEM	1.36
	Franco Nevada FNV	0.82	Franco Nevada FNV	0.82
	VanEck Vectors Gold ETF GDX US	0.59	VanEck Vectors Gold ETF GDX US	0.59
			SPDR Gold Bullion GLD US	0.00
	BMO Global Base Metals ETF ZMT	2.91	BMO Global Base Metals ETF ZMT	2.91
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.32
Industrials	Toromont TIH	1.69	Toromont TIH	1.69
	Air Products APD US	2.16	Air Products APD US	2.16
	WSP Global WSP	1.70	WSP Global WSP	1.70
	CNR	1.88	CNR	1.88
	Raytheon Technologies RTX US	2.64	Raytheon Technologies RTX US	2.64
	Stantec STN	1.47	Stantec STN	1.47
	Aecon Group ARE	4.15	Aecon Group ARE	4.15
	Honeywell HON US	2.23	Honeywell HON US	2.23
	TFI Int’l TFII	2.33	TFI Int’l TFII	2.33
Consumer Discretionary	Home Depot HD US	2.35	Home Depot HD US	2.35
	Target TGT US	2.17	Target TGT US	2.17
	Restaurant Brands Int’l QSR	3.63	Restaurant Brands Int’l QSR	3.63
			Amazon AMZN US	0.00
	Lowes LOW US	1.68	Lowes LOW US	1.68
Communication Services	Rogers B RCI.B	3.40	Rogers B RCI.B	3.40
	Comcast CMCSA US	2.19	Comcast CMCSA US	2.19
	Telus T	4.67	Telus T	4.67
	Shaw Commications SJR.B	4.91	Shaw Communications SJR.B	4.91
			Facebook FB US	0.00
			VanEck Video Gaming ESPO US	0.17
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.65	Alimentation Couche Tard ATD.b	0.65
	Loblaws L	1.87	Loblaws L	1.87
	Sysco SYY US	2.92	Sysco SYY US	2.92
	Unilever PLC UL US	3.16	Unilever PLC UL US	3.16
Technology	Apple AAPL US	0.99	Apple AAPL US	0.99
	Microsoft MSFT US	1.09	Microsoft MSFT US	1.09
	Open Text OTEX	1.66	Open Text OTEX	1.66
	Paychex PAYX US	3.10	Paychex PAYX US	3.10
	Logitech Int’l LOGI US ADR	1.28	Logitech Int’l LOGI US ADR	1.28
	Qualcomm QCOM US	2.94	Qualcomm QCOM US	2.94
	Intel INTC	2.05	Intel INTC	2.05
			CGI Inc. GIB.A	0.00
			ETFMG Prime Cyber Sec. HACK US	1.43
			Visa V US	0.60

Utilities	Algonquin Power AQN	4.53	Algonquin Power AQN	4.53
	Northland Power NPI	3.60	Northland Power NPI	3.60
	NextEra Energy NEE US	2.20	NextEra Energy NEE US	2.20
	Fortis FTS	3.55	Fortis FTS	3.55
Healthcare	Becton Dickinson BDX US	1.31	Becton Dickinson BDX US	1.31
	Merck MRK US	2.97	Merck MRK US	2.97
	United Healthcare UNH US	1.60	United Healthcare UNH US	1.60
	CVS Healthcare CVS US	2.93	CVS Healthcare CVS US	2.93
	Bristol Myers BMY US	2.93	Bristol Myers BMY US	2.93
			Danaher DHR US	0.42
			Thermo Fisher Scientific TMO US	0.25



Real Estate	Cdn Apt. REIT CAR.un	2.84	Cdn. Apt. REIT CAR.un	2.84
	CT Reit CRT.un	5.62	CT Reit CRT.un	5.62
	InterRent REIT IIP.un	2.12	InterRent REIT IIP.un	2.12
	Dream Industrial DIR.un	6.35	Dream Industrial DIR.un	6.35
	Summit REIT SMU.un	4.73	Summit REIT SMU.un	4.73
European Equity	iShares MSCI Europe XEU	3.79	iShares MSCI Europe XEU	3.79

McMurtry Investment Report – Sector Weights (June 2020)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	18.59	28.60	10.40	18.59
Energy	7.67	13.50	2.90	7.67
Materials	7.72	14.10	2.50	7.72
Industrials	9.77	11.70	8.00	9.67
Consumer Disc.	7.35	3.50	10.50	7.35
Comm. Services	8.66	5.80	11.00	8.66
Consumer Staples	5.89	4.40	7.10	5.89
Technology	19.26	9.30	26.20	18.60
Utilities	4.55	5.20	3.20	4.10
Real Estate	1.40	3.00	2.80	2.89
Healthcare	9.15	1.00	15.20	8.81
Totals	100.00	100.10	99.80	99.94

McMurtry Investment Report Asset Mix June 2020)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	35.00	35.00
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	45.00	55.00
CDN	18.90	23.40
US	23.10	28.60
Europe	3.00	3.00
Emerging Markets	0.00	0.00

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 and Model Portfolios™

McMurtry Investment Report Portfolios – June 2020

Investment Commentary June 2020

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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