Also available in PDF: MIR Portfolios May 2020
Investment Commentary May 2020
Fund Flows into Capital Markets
The movement of cash back into equities was quite remarkable after the recent market meltdown. Apart from the last several days when markets turned down once again, US buying of equity mutual funds and ETF’s was high. This can be attributed to two things – a very accommodative Federal Reserve Bank and investors with high cash positions waiting to get back into the market.
US Yield Curve
The 10 year minus 2 year US Treasury yield curve has risen from zero recently to 50 basis points. This level is low historically but still above zero.
US Corporate Debt Spreads
The current US investment grade spread over US Treasuries is around 2.2%. This compares to the 4.5% spread during the last recession of 2007-2008.
US / China Trade Issues
Trump and Peter Navarro are ramping up negative trade talk against China once again, blaming them for the Covid -19 rapid spread globally.
Covid – 19 Health and Economic Implications
Both China and South Korea saw a plateauing of the domestic virus cases first before any other countries. Their extreme lockdown measures have really paid off and the numbers reflect this. Both countries are just beginning to re-open for business but will remain vigilant in terms of social distancing and the wearing of masks and gloves.
The rest of the world may not be ready to fully reopen until either a vaccine becomes available or some current anti-viral medications prove very effective in fighting off the virus. At this point this is not the case. Furthermore, there still are not enough test kits to protect the entire population. While Trump wants all US states to completely end their current lockdowns, many US governors clearly do not agree with him. Both Dr. Fauci, the current head of the Centre for Disease Control and Scott Gottlieb, the former head of the Federal Drug Administration, have spoken out advocating a much slower end to the lockdowns than what is being proposed by Trump. Both these two men along with Bill and Melinda Gates believe strongly that reopening too soon will lead to a probable surge in new cases in the fall unless either a vaccine or effective anti-viral can control future outbreaks.
Regardless of what Trump proposes in terms of reopening their economy, what really matters is the public’s level of fear regarding their health. No one can force anyone else to travel, go out to a restaurant or bar, stay in a hotel or go to a sports event unless they feel safe. Government legislation can force the public back to work but that is all they can do.
As consumer spending represents about 70% of most countries’ economies, this public fear factor will remain a real headwind for economic growth.
Equity Market Valuations
Market valuations dipped recently with the equity market collapse, but have rebounded sharply since then and are now at 18-19 times earnings, not cheap historically.
US Corporate Profit Growth
The majority of US companies have withdrawn their future earnings guidance numbers as a result of the economic repercussions of the Covid-19 virus.
Global Economic Recession
Globally all countries remain in a recession.
Central Bank Monetary Policy
While all central banks remain very accommodative in terms of keeping rates low, the US Federal Reserve just made a recent decision to start purchasing US high yield distressed debt held in Exchange Traded Funds. This is unprecedented for a Central Bank to do this and clearly indicates their level of commitment to ensure that economic growth does not collapse.
Global Fiscal Policy Measures
All countries remain fully committed to stimulating their domestic economies through both fiscal and monetary measures.
I sent out a portfolio blog on April 20th of last month to recommend an increase of 5% in cash for both portfolios to 35%, with a corresponding reduction in equities of the same amount. After this change, my Income and Growth portfolios have 45% and 55% in equities respectively.
Equity markets have rebounded much too quickly without any improvement evident in the economy. While the stock market is a leading indicator, its recent rebound in the midst of this health pandemic is not justified. It remains to be seen if equity markets will retest their recent lows. However, any positive news on a possible vaccine or ant-viral medication will be met positively by the market. The recent end to the lockdowns may prove to be premature as the probability of more people becoming infected in the fall is highly likely. Under these circumstances it is not prudent to be fully invested with very little cash. There continues to be a lot of uncertainty and having a cash surplus available to use to buy more equities after they correct once again makes the most sense at this time.
Equity Sector Weights
As a result of the recent OPEC agreement to cut production aggressively in addition to the probable peaking of US fracking production, the long term supply demand situation is just starting to improve. As the world gradually reopens for business, demand for crude oil will pick up once again.
There will most likely be several companies in this sector that will not make it financially. Thus it is important to investors to concentrate on energy companies with strong balance sheets, low debt levels and positive operating cash flows. I am increasing my sector weight to market weight from underweight previously as a result of these recent industry changes.
On April 15th I sent out a portfolio blog to reduce my Reit sector weight to half the 3% benchmark weight. My new weight is 1.5%, compared to 2.99% for the 55% Us 45% Canadian benchmark weight. While Reits are a defensive group normally in a strong economy with low rates, they tend to perform poorly in a recession when net asset values start to plummet.
Most of you are aware that financial stocks are cyclical in nature and tend not to perform well in a recession. Low rates make it hard for banks to make money on their interest rate spreads. Secondly provisions for bad loans start to escalate in a recession with many companies and individuals defaulting on their loans. Thus, I am increasing my underweight for the Financials.
Given the weakening consumer sector, I am reducing the Consumer Discretionary sector from overweight to market weight.
I am increasing my overweight in the Technology sector with its strong growth opportunities.
For all equity sectors, continue to focus on quality companies with strong balance sheets and healthy operating cash flows.
I am adding Shaw Communications B to both portfolios in the Communications sector. The stock has an attractive 5.22% dividend and offers more growth opportunities than its peers with its recent entry into the wireless space.
I am deleting Strauman from the Growth portfolio in the Heathcare sector. The Swiss dental implant company is a strong company but its overall business is facing stiff headwinds in the midst of this Covid-19 pandemic. Dental implants are not considered essential and are being deferred.
Finally, in the Reit sector, I am deleting both the US ETF, XLRE, and WPT Industrial from both portfolios. I do not want to own a sector Reit in this current environment as it has exposure to office, retail and retirement home areas where there are considerable current problems. WPT Industrial is a smaller Canadian Reit whose business is all in the US. While it is an industrial Reit, its small size prohibits it from competing effectively against their stronger US peers.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (May 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||5.09||Royal Bank RY||5.09|
|Intact Financial IFC||2.42||Intact Financial IFC||2.42|
|TD TD||5.57||TD TD||5.57|
|Sun Life SLF||4.64||Sun Life SLF||4.64|
|JP Morgan JPM US||4.14||JP Morgan JPM US||4.14|
|Manulife Fin’l MFC||6.61||Manulife Fin’l MFC||6.61|
|Bank of America BAC US||3.29||Bank of America BAC US||3.29|
|Morgan Stanley MS US||3.64||Morgan Stanley MS US||3.64|
|T. Rowe Price TROW US||3.19||T. Rowe Price TROW US||3.19|
|Allstate ALL US||2.21||Allstate ALL US||2.21|
|Energy||Suncor SU||3.54||Suncor SU||3.54|
|Canadian Natural Resources CNQ||7.18||Canadian Natural Resources CNQ||7.18|
|Freehold FRU||4.65||Freehold FRU||4.65|
|Enbridge ENB||7.14||Enbridge ENB||7.14|
|TC Energy TRP||5.03||TC Energy TRP||5.03|
|Whitecap Resources WCP||9.94||Whitecap Resources WXP||9.94|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||1.17||Agnico Eagle AEM||1.17|
|Franco Nevada FNV||0.72||Franco Nevada FNV||0.72|
|VanEck Vectors Gold ETF GDX US||0.55||VanEck Vectors Gold ETF GDX US||0.55|
|SPDR Gold Bullion GLD US||0.00|
|BMO Global Base Metals ETF ZMT||3.91||BMO Global Base Metals ETF ZMT||3.91|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.28|
|Industrials||Toromont TIH||1.91||Toromont TIH||1.91|
|Air Products APD US||2.33||Air Products APD US||2.33|
|WSP Global WSP||1.71||WSP Global WSP||1.71|
|Raytheon Technologies RTX US||3.35||Raytheon Technologies RTX US||3.35|
|Stantec STN||1.49||Stantec STN||1.49|
|Aecon Group ARE||4.46||Aecon Group ARE||4.46|
|Honeywell HON US||2.82||Honeywell HON US||2.82|
|TFI Int’l TFII||2.76||TFI Int’l TFII||2.76|
|Consumer Discretionary||Home Depot HD US||2.58||Home Depot HD US||2.58|
|Target TGT US||2.21||Target TGT US||2.21|
|Restaurant Brands Int’l QSR||3.96||Restaurant Brands Int’l QSR||3.96|
|Amazon AMZN US||0.00|
|Lowes LOW US||1.98||Lowes LOW US||1.98|
|Communication Services||Rogers B RCI.B||3.52||Rogers B RCI.B||3.52|
|Comcast CMCSA US||2.60||Comcast CMCSA US||2.60|
|Telus T||5.10||Telus T||5.10|
|Shaw Commications SJR.B||5.22||Shaw Communications SJR.B||5.22|
|Facebook FB US||0.00|
|VanEck Video Gaming ESPO US||0.19|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.69||Alimentation Couche Tard ATD.b||0.69|
|Loblaws L||1.80||Loblaws L||1.80|
|Sysco SYY US||3.65||Sysco SYY US||3.65|
|Unilever PLC UL US||3.43||Unilever PLC UL US||3.43|
|Technology||Apple AAPL US||1.05||Apple AAPL US||1.05|
|Microsoft MSFT US||1.12||Microsoft MSFT US||1.12|
|Open Text OTEX||1.77||Open Text OTEX||1.77|
|Paychex PAYX US||3.87||Paychex PAYX US||3.87|
|Logitech Int’l LOGI US ADR||1.43||Logitech Int’l LOGI US ADR||0.43|
|Qualcomm QCOM US||3.32||Qualcomm QCOM US||3.32|
|CGI Inc. GIB.A||0.00|
|ETFMG Prime Cyber Sec. HACK US||1.57|
|Visa V US||0.67|
|Utilities||Algonquin Power AQN||4.65||Algonquin Power AQN||4.65|
|Northland Power NPI||3.90||Northland Power NPI||3.90|
|NextEra Energy NEE US||2.46||NextEra Energy NEE US||2.46|
|Fortis FTS||3.60||Fortis FTS||3.60|
|Healthcare||Becton Dickinson BDX US||1.21||Becton Dickinson BDX US||1.21|
|Merck MRK US||3.16||Merck MRK US||3.16|
|United Healthcare UNH US||1.50||United Healthcare UNH US||1.50|
|CVS Healthcare CVS US||3.16||CVS Healthcare CVS US||3.16|
|Bristol Myers BMY US||2.84||Bristol Myers BMY US||2.84|
|Danaher DHR US||0.45|
|Thermo Fisher Scientific TMO US||0.27|
|Real Estate||Cdn Apt. REIT CAR.un||2.93||Cdn. Apt. REIT CAR.un||2.93|
|CT Reit CRT.un||6.39||CT Reit CRT.un||6.39|
|InterRent REIT IIP.un||2.21||InterRent REIT IIP.un||2.21|
|Dream Industrial DIR.un||7.58||Dream Industrial DIR.un||7.58|
|Summit REIT SMU.un||5.53||Summit REIT SMU.un||5.53|
|European Equity||iShares MSCI Europe XEU||4.21||iShares MSCI Europe XEU||4.21|
|McMurtry Investment Report – Sector Weights (May 2020)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix May 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|