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.
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.
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
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|McMurtry Investment Report – Portfolios (June 2020)|
|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|
|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|
|McMurtry Investment Report Asset Mix June 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|