McMurtry Investment Report Portfolios – March 2020

Also available in PDF: MIR Portfolios March 2020

Investment Commentary March 2020

Fund Flows into Capital Markets

The combination of Covid-19 virus issues combined with the recent crude oil price collapse has resulted in a massive selling of equities with a corresponding purchase of US Treasuries.

US Yield Curve

The US Treasury yield curve has flattened considerably from last month with the ten year yields materially below 1%.

US Corporate Debt Spreads

Corporate debt spreads have begun to widen sharply from last month and this is a bad signal for economic growth. At least 11-15% of the US high yield market consists of highly leveraged shale oil producers that are now in serious trouble with crude prices collapsing.

US / China Trade Issues

No change since last month

China’s Coronavirus Implications

While the growth in new cases in China has eased off somewhat, the growth in the rest of the world is increasing at an alarming rate. The World Health Organization has just declared the Covid-19 virus as a global pandemic.

New test kits are just becoming available in the US and this implies that the incidence of new cases will rise substantially. Italy and Iran are in a state of emergency and Germany is not far behind.

On a global basis, all this quarantining to prevent the spread of the virus is resulting in global economic growth turning sharply negative. The probability of a global economic recession has increased sharply from last month and many strategists believe it is inevitable given what has transpired.

Equity Market Valuations

Market valuations have come down from 19 times to 17 times in the US with the recent equity market decline. However, the earnings are also declining at the same time making it very difficult to come up with an appropriate market valuation.

US Corporate Profit Growth

New estimates for US earnings growth have come down sharply from last month and are expected to be at best flat this year over last year.

Probability of a Global Economic Recession

The probability has increased sharply from last month and is now generally an expected outcome. However, strategists are still divided on the recession being a quick V- shaped one or one where the growth takes longer to resume.

Central Bank Monetary Policy

Global central banks are all cutting rates to try to mitigate the economic damages from both the Covid-19 virus and the economic uncertainty created by the recent oil price decline.

Global Fiscal Policy Measures

Fiscal policies globally are all now in a stimulative mode and this may help to reduce the negative effects from the current economic problems.

Lower Crude Oil Prices good for the Consumer

We must not forget that lower energy prices are good for the consumer, while not great for the US shale producers and their financial backers.

Asset Mix

I am increasing my cash levels by 10% for both portfolios to 40%. I am recommending both a 5% reduction in equities and the removal of my 5% position in US High Yield ETF, XHY.

Equity Sector Weights

Resulting from the current economic malaise, I am recommending the continuation of a defensive posture in regards to equity sector weights. I am increasing my weights in both the defensive Reit and Utility sectors.

I am materially increasing my underweight in Energy. However, I expect that OPEC and Russia will settle their differences over the next few months, so it is important to maintain some exposure.

I remain underweight Financials, Energy and Consumer Staples.

I remain overweight Technology, Industrials, Utilities, Reits and Consumer Discretionary.

I remain market weight Materials, Communications and Healthcare.

Individual Positions

I am eliminating my entire holding in the US High Yield Income ETF, XHY. Yield spreads are beginning to rise in this economic slowdown and the recent crude price decline will hurt the US shale producers that normally use the high yield market to finance their growth.

In a blog on March 2, I recommended switching out of Cisco into Qualcomm, in the US high tech sector.

I am deleting PNC Financial from both portfolios in the Financial Sector as regional banks like PNC have much smaller wealth management operations and make most of their profits from net interest margins. Taking into account the recent decline in rates with more to come on the downside, US Regional banks’ profitability will be negatively affected by falling rates.

I am adding Allstate, the large US property and casualty insurance company to both portfolios in the Financial Sector. The shares are cheap trading under ten times projected earnings and offer an attractive well covered dividend yield of 2.18%. Similar to Intact Financial, Allstate is not nearly as negatively affected from falling interest rates as life companies are.

In the Energy sector I am deleting both Baytex and Pembina for different reasons. Baytex is a small cap higher cost producer of crude that will have difficulty in the current crude oil price environment. Differing from Enbridge and TC Energy, Pembina has some commodity exposure and is more vulnerable to weak financially strapped producers sharply reducing overall volumes.

Lastly in the Consumer Products area, I am deleting Constellation Brands from both portfolios. The company’s massive investment in the Canadian cannabis company, Canopy Growth, is not paying off as planned.

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

McMurtry Investment Report – Portfolios (March 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	4.68	Royal Bank RY	4.68
	Intact Financial IFC	2.40	Intact Financial IFC	2.40
	TD TD	5.25	TD TD	5.25
	Sun Life SLF	4.11	Sun Life SLF	4.11
	JP Morgan JPM US	3.57	JP Morgan JPM US	3.57
	Manulife Fin’l MFC	5.46	Manulife Fin’l MFC	5.46
	Bank of America BAC US	3.05	Bank of America BAC US	3.05
	Morgan Stanley MS US	3.54	Morgan Stanley MS US	3.54
	T. Rowe Price TROW US	3.19	T. Rowe Price TROW US	3.19
	Allstate ALL US	2.18	Allstate ALL US	2.18
Energy
	Suncor SU	6.71	Suncor SU	6.71
	Canadian Natural Resources CNQ	7.71	Canadian Natural Resources CNQ	7.71
	Freehold FRU	14.58	Freehold FRU	14.58
	Enbridge ENB	7.29	Enbridge ENB	7.29
	TC Energy TRP	4.97	TC Energy TRP	4.97
	Whitecap Resources WCP	16.21	Whitecap Resources WXP	16.21
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.57	Agnico Eagle AEM	1.57
	Franco Nevada FNV	0.90	Franco Nevada FNV	0.90
	VanEck Vectors Gold ETF GDX US	0.72	VanEck Vectors Gold ETF GDX US	0.72
	BMO Global Base Metals ETF ZMT	3.67	BMO Global Base Metals ETF ZMT	3.67
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.55
Industrials	Toromont TIH	1.93	Toromont TIH	1.93
	NFI Group NFI	5.98	NFI Group NFI	5.98
	Air Products APD US	2.50	Air Products APD US	2.50
	WSP Global WSP	1.87	WSP Global WSP	1.87
	CNR	2.10	CNR	2.10
	United Technologies UTX US	2.46	United Technologies UTX US	2.46
	Stantec STN	1.59	Stantec STN	1.59
	Aecon Group ARE	3.84	Aecon Group ARE	3.84
	Honeywell HON US	2.23	Honeywell HON US	2.23
	TFI Int’l TFII	2.82	TFI Int’l TFII	2.82
Consumer Discretionary	Home Depot HD US	2.66	Home Depot HD US	2.66
	Target TGT US	2.44	Target TGT US	2.44
	Restaurant Brands Int’l QSR	3.84	Restaurant Brands Int’l QSR	3.84
			Amazon AMZN US	0.00
	Lowes LOW US	2.11	Lowes LOW US	2.11
Communication Services	Rogers B RCI.B	3.28	Rogers B RCI.B	3.28
	Comcast CMCSA US	2.35	Comcast CMCSA US	2.35
	Telus T	4.78	Telus T	4.78
			VanEck Video Gaming ESPO US	0.22
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.60	Alimentation Couche Tard ATD.b	0.60
	Loblaws L	1.85	Loblaws L	1.85
	Sysco SYY US	2.88	Sysco SYY US	2.88
	Unilever PLC UL US	3.28	Unilever PLC UL US	3.28
Technology	Apple AAPL US	1.08	Apple AAPL US	1.08
	Microsoft MSFT US	1.27	Microsoft MSFT US	1.27
	Open Text OTEX	1.73	Open Text OTEX	1.73
	Paychex PAYX US	3.23	Paychex PAYX US	3.23
	Logitech Int’l LOGI US ADR	1.89	Logitech Int’l LOGI US ADR	1.89
	Qualcomm QCOM US	3.14	Qualcomm QCOM US	3.14
			ETFMG Prime Cyber Sec. HACK US	0.55
			Visa V US	0.66

Utilities	Algonquin Power AQN	3.77	Algonquin Power AQN	3.77
	Northland Power NPI	4.02	Northland Power NPI	4.02
	Fortis FTS	3.43	Fortis FTS	3.43
Healthcare	Becton Dickinson BDX US	1.33	Becton Dickinson BDX US	1.33
	Merck MRK US	2.97	Merck MRK US	2.97
	United Healthcare UNH US	1.54	United Healthcare UNH US	1.54
	CVS Healthcare CVS US	3.19	CVS Healthcare CVS US	3.19
	Bristol Myers BMY US	3.11	Bristol Myers BMY US	3.11
			Danaher DHR US	0.50
			Thermo Fisher Scientific TMO US	0.29
			Straumann ADR SAUHY US *	0.55


Real Estate	Cdn Apt. REIT CAR.un	2.41	Cdn. Apt. REIT CAR.un	2.41
	CT Reit CRT.un	5.19	CT Reit CRT.un	5.19
	US Real Estate SPDR XLRE US	3.02	US Real Estate SPDR XLRE US	3.02
	InterRent REIT IIP.un	1.71	InterRent REIT IIP.un	1.71
	Dream Industrial DIR.un	5.78	Dream Industrial DIR.un	5.78
	WPT Ind. WIR.un	5.61	WPT Ind. WIR.un	5.61
	Summit REIT SMU.un	4.34	Summit REIT SMU.un	4.34
European Equity	iShares MSCI Europe XEU	4.19	iShares MSCI Europe XEU	4.19

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

McMurtry Investment Report – Sector Weights (March 2020)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	21.06	32.30	12.20	21.25
Energy	7.00	15.90	3.60	9.14
Materials	6.24	10.80	2.50	6.24
Industrials	10.20	11.30	8.90	9.98
Consumer Disc.	7.30	3.90	9.90	7.20
Comm. Services	8.36	5.50	10.70	8.36
Consumer Staples	5.00	4.00	7.20	5.76
Technology	17.25	6.30	24.40	16.26
Utilities	5.03	5.20	3.50	4.27
Real Estate	4.38	3.70	3.10	3.37
Healthcare	8.20	1.10	14.00	8.20
Totals	100.00	100.00	100.00	100.00

McMurtry Investment Report Asset Mix March 2020)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	40.00	40.00
Bonds – Regular	20.00	10.00
Bonds – High Yield	0.00	0.00
Preferreds	0.00	0.00
Equities	40.00	50.00
CDN	16.65	21.15
US	20.35	25.85
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 & Model Portfolios

McMurtry Investment Report Portfolios – March 2020

Investment Commentary March 2020

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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