Also available in PDF: McMurtry Investment Report Portfolio – June 2022
Investment Commentary June 2022
US Yield Curve
The 10-2-year US Treasury yield curve jumped up to the May 31st level of 0.32% from last month’s 0.19%. The recent steepening of the yield curve is not entirely unexpected with the Federal Reserve’s ending of their ongoing monthly bond purchases of longer- term maturities and the commencement of their balance sheet liquidation of longer maturities. Domestic US inflation remains high but there are some signs of a possible peaking in the year over year inflationary stats.
US Corporate Debt Spreads
As of May 27, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries rose modestly by twenty basis points to 2.26% from last month.
Covid – 19 Health Stats
Over the last ninety days, the 7-day average number of new cases and deaths has steadily declined in China. This statistic is odd taking into account the Communist Government’s sharp increase in lockdowns, especially in Shanghai.
In the US over the last 90 days, the 7-day average amount of new cases has remained about flat while the number of deaths continues to decline.
Lastly in Canada over the last 90 days, the 7-day average number of new cases has steadily declined. The same trend is true for the number of deaths but the number of deaths has remained quite volatile.
Equity Market Valuations
The forward PE multiple of the S&P 500 is approximately the same as last month at 17.5 times.
Central Bank Monetary Policy
Faced with rising inflationary pressures, the US Federal Reserve Bank remains totally committed to controlling inflation by reducing the balance sheet and increasing interest rates.
Asset Mix
The hawkish intent of the Federal Reserve is not likely to end until the rate of inflation is controlled. Currently this is not the case. In addition, the Russia/ Ukraine war is continuing and the sanctions against Russia and Belarus are not likely to cease when the war ends. There is some good news in terms of the China lockdowns, but this could change at any time.
The jury is still out in regards to an upcoming global recession. But we do know that equity markets will remain volatile until a clearer picture emerges about the eventual peaking in inflation.
Under this scenario I am raising another 5% in cash with a corresponding reduction of the same amount in equities. Even if the world can avoid a global recession, the threat of ongoing high inflation with slowing economic growth, or stagflation, will not be great for equity markets. Commodity stocks are the exception and they can still perform well in a high inflationary environment. The recent rebound in equity prices may end up being short lived, with markets that may retest their recent lows before all this is over.
I am increasing my Emerging Market equity weight by 1% for both portfolios with valuations becoming more attractive after the recent selloff.
Equity Sector Weights
I am maintaining my overweight in the cyclical sectors, namely Financials, Energy, Industrials, Materials, REITS and Consumer Discretionary. I remain underweight Technology, Communications, Consumer Staples and Utilities. I am going from underweight Healthcare to market weight with the industry’s solid fundamentals.
Individual Equity Changes
In a blog dated May 25th, I added Cameco, the Canadian uranium producer to the Growth portfolio in the Energy sector. European nuclear power plants are seeking alternative long- term supplies of uranium outside of Russia. Cameco is expected to be a beneficiary of this. Long term contracts are much more lucrative for Cameco than one off arrangements.
On May 24th in a blog, I deleted both Nutrien and Mosaic from all portfolios. While fertilizer stocks have recently benefited from higher prices as a result of the Ukraine war, there is a proposal on the table by the UN Secretary to restore grain shipments from Ukraine in exchange for reviving fertilizer exports from Russia and Belarus. Should this agreement work out, fertilizer prices will most likely fall.
In a blog dated May 16th, I added Aritzia to the Growth portfolio in the Consumer Discretionary sector. This company is one of North America’s strongest specialty retailers of women’s clothing with both bricks and mortar and online stores in Canada and the US. Both EPS and EBITDA are expected to continue their strong growth trajectory.
In a blog dated May 9th, I deleted Amazon from the Growth portfolio with the proceeds directed back into Google. Amazon’s operating costs have been rising rapidly while their margins continue to contract. On the other hand., Google has kept both its costs and operating margins much more stable.
In a blog dated May 9th, I added Quebecor B to both portfolios in the Communications sector. Recently Rogers takeover of Shaw Communications was rejected by the Competition Bureau until more clarification is provided by Rogers in regards to a buyer of Shaw’s wireless operations. Quebecor is the natural fit. Rogers has put forward a US hedge fund, but the Competition Bureau is not likely to find a US company acceptable.
In a blog dated May 5th, I advised a switch out of Curaleaf into a bitcoin ETF, BTCX.U. While prices for bitcoin have been on a downwards trajectory recently, the long-term popularity of cryptocurrency is surely going to increase. On the other hand, the cannabis industry is seeing falling prices with capacity exceeding demand.
Finally in the Reit sector, I am deleting Canadian Apartment Reit from both portfolios and advising the proceeds be redirected into Inter-Rent Reit. While both are Ontario apartment Reits that will be negatively affected by any government regulatory changes, Inter-Rent is considerably cheaper than its larger competitor and is expected to grow its EBITA over the next two years at a pace more than double Canadian Apartment Reit.
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