McMurtry Investment Report Portfolios May 2024
Also available in PDF: McMurtry Investment Report – May 2024
Investment Commentary May 2024
US Yield Curve
The 2–10-year US Treasury yield curve inversion increased slightly to a minus 37 basis points as of May 10th.
US Corporate Debt Spreads
Investment grade US corporate debt spreads declined by 3 basis points to a level of 1.48% as of May 9th. This is consistent with an improving US economy.
China
The Chinese economy remains weak and the government is still not stimulating sufficiently.
Equity Market Valuations
The forward PE of the S&P 500 fell to 20.1 times as of May 10th.
US Corporate Earnings
US corporate earnings recently bottomed and are trending higher. 449 out of 500 companies have already reported their 1st quarter numbers with 75% beating their consensus estimates. Revenues for the 1st quarter jumped by 4.1% year over year. Operating costs are now rising at a slower pace, thereby improving operating margins. Earnings are expected to rise by at least 5.4% this year. It should be pointed out that companies that beat both revenue and earnings estimates rose by 0.7%, while companies that missed on the top and bottom lines fell by an average of 4.3%.
Central Bank Monetary Policy
The rhetoric from the Federal Reserve and especially from its Chairman have materially changed since last month. While the Central Bank remains data dependent, they are more conscious of some slowing economic trends and have thus become more dovish in recent weeks. According to the Federal Reserve Bank’s Chicago President, Austan Goolsbee, inflation is most definitely coming down. He expects a soft landing. While corporate earnings are now trending back up, US Real GDP only rose by 1.60% in the first quarter of this year, compared to a much higher 3.4% in the 4th quarter of last year. Employment growth is easing off and consumer sentiment, measured by the University of Michigan, fell to 67.4 in May from 77.2 in April, the lowest level in six months.
Asset Mix
Based on a more accommodative Central Bank and a rebounding of corporate profits, I am increasing the equity weight for both portfolios by 5% with cash being reduced by the same amount.
In addition, I am marginally increasing the average term in the fixed income area by adding back the 7–10-year US Treasury ETF, IEF.
Once again, I am reducing my North American benchmark Canada / US weight from the current 50% Canada 50% US, to the new level of 45% Canada and 55% US. This change is being made to reduce the portfolio volatility by slightly reducing the cyclical component. However, I remain fully committed to the Canadian equity market with its commodity exposure in Energy and Materials. We have all seen how the domestic copper and gold producers have outperformed recently and expect this to continue with the US dollar beginning to peak against global currencies.
Asset Mix- ETF Portfolios
Similar to the individual portfolios’ asset mix, I am increasing the equity weight for both portfolios by 5%, while reducing cash weight at the same time.
Equity Sector Recommendations
My 5% reduction in my North American equity benchmark weight for Canada automatically increases my Technology and Communications weights and reduces the cyclical/ value component accordingly.
I remain overweight Industrials, Materials, Consumer Discretionary and Reits. I remain underweight Consumer Staples, Utilities and Healthcare. I remain market weight Financials, Technology, Communications and Energy.
Individual Stock Changes
In a blog dated May 10th, I added AtkinsRealis, ATRL.TO, to the Growth portfolio in the Industrials sector. This is the old SNC Lavalin with a name change. The company has turned the corner from the numerous scandals of several years ago. The company is involved in both engineering and construction and more recently in nuclear reactor infrastructure. The company is expected to grow its EPS this year by over 31% with EBITDA projected to grow by almost 20% over the same period. Its order backlog for 2023 was up by an impressive 16%.
In the same Industrials sector, I am deleting Toromont from both portfolios. This is a quality company that I have held for a long time. However, consensus estimates for this year are for negative growth in both EPS and EBITDA.
In the Financial sector, I am deleting Sun Life from both portfolios in the Financials sector. Once again, this is a quality company that has now experienced a slowing in growth in several of its businesses. Its recent quarter saw both weak top and bottom- line numbers. Significant outflows of investable assets from MFS and US dental revenues falling by 79% resulting from Medicaid redeterminations, contributed to the weak quarterly numbers. I recommend that you switch into more shares of Manulife, that is growing much better. As always please ensure that your investment in Manulife is no more than 3-5% of your total equity holdings.
In a blog dated April 9th, I added Amazon back to the Growth Portfolio in the Consumer Discretionary sector. The company is exhibiting solid growth, especially in its flagship Amazon Web services cloud division. EPS revisions were all pointing to a strong quarter that was announced last week and the company did not disappoint with its solid results.
In a blog dated April 9th, I added the iShares Japanese Equity ETF, EWJ-US, to both portfolios. Japanese equities are much cheaper than US equity markets and offer a reasonable dividend yield of 1.29%.
Lastly in my recent newsletter I am adding Wisdom Tree’s Artificial Intelligence ETF, WTAI-US to the Growth Portfolio. Differing from many ETFs in this category, this one contains both large, mid and small cap companies. It has experienced a solid 1- year total return of 20.47%.
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