Also available in PDF: MIR Portfolios October 2019
Investment Commentary October 2019
Equity markets have turned down after the probability of resolving the trade dispute in the near future between the US and China looks less probable. On top of that the ongoing Brexit talks are going nowhere creating a lot of uncertainty in both the UK and Europe.
In addition to these issues, last week showed a very grim US manufacturing sector in the midst of a very serious slowdown. The combination of restrictive export tariffs combined with a sharp increase in corporate executive uncertainty do not bode well for this sector over the immediate term.
The European economy is on the verge of a recession with Germany continuing to have negative interest rates. Negative rates are clearly not good for the financial sector as they remove any incentive to place your savings in the bank where you would have to pay to keep your funds deposited with them. Banks rely on obtaining cheap deposits where they can lend them out to earn a nice spread.
Despite the slowdown in US manufacturing, consumer spending remains relatively buoyant domestically. Employment growth is still doing well albeit at a slower rate than last year. The housing sector is still doing well as evidenced by the recent quarterly results of Lennar, one of the largest players in the US housing industry.
The US yield curve, 10 year less 2 year Treasuries, is still positively sloped but there are some maturities showing the curve is inverted. Domestic US corporate bond spreads of 2.6% over US Treasuries are inching up somewhat, but remain much lower than the spread of 6% plus recorded in the last recession of 2007-2008.
The Federal Reserve is still in an accommodative stance and is expected to lower interest rates several times before year end. The outlook for inflation continues to be muted as shown by the recent flattening of US wage growth.
All of the above factors appear pretty mixed at best. However, the numbers still do not indicate any US recession over the next twelve months.
US corporate profit growth continues to decline from last year and the current consensus earnings growth rates for the S&P 500 for 2020 are still much too high at 11%. A more likely scenario is for an increase of 2-4% year over year.
There appears to be a considerable amount of cash on the sidelines waiting for any market pullback before recommitting some funds back into the market. The yield on the US equity market remains higher than the one for 10 year US treasury bonds and this factor helps to maintain an underlying demand for dividend paying equities.
Taking all these diverse factors into consideration, I am maintaining the overall asset mix for both portfolios from last month. The combination of 30-35% cash plus a focus on the market’s more defensive sectors will help to maintain the consistency of returns.
However, I am making several equity changes to reduce the overall portfolio volatility. These changes are important in a market like we have today with both political and economic issues randomly coming to the forefront at any time.
In terms of equity sectors, I am making the following changes:
Reduce financial services to underweight from market weight
Reduce industrials to market weight from overweight
Reduce Communication services to underweight from market weight
All other sectors remain the same.
In the REIT sector I added CT Reit in a portfolio online note at the end of last month to both portfolios. The Reit is well capitalized, being the subsidiary to Canadian Tire, and offers a growing and attractive distribution yield.
In the Consumer Discretionary sector, I deleted both Canadian Tire Class A and Magna from both portfolios. Magna is suffering from the slowdown in the auto industry and I prefer to own the Canadian Tire Reit over the parent company that will continue to experience a difficult domestic retail industry.
In the Financial services sector, I deleted Citibank from both portfolios. It is more international than many US banks and is expected to experience headwinds from the ongoing trade wars and from the effects of the Brexit uncertainty.
In the Industrials sector, I am deleting CP from both portfolios. There is an industry wide slowdown in the rail industry and in this environment I prefer holding CNR. In addition, I am removing Invesco’s Industrial ETf, RGI, from both portfolios with the slowdown in manufacturing globally.
In the Healthcare sector, I am deleting the IBB biotech ETF from the Growth portfolio with all the bipartisan rhetoric regarding drug price increases. I am also removing the US healthcare ETF, IYH, from both portfolios, preferring to hold individual names with better prospects.
Lastly in the Communication Services sector, I am deleting Facebook from the growth portfolio. The possible regulatory changes will most likely affect Facebook more than Alphabet – Google that has a more diversified group of products and services.
Peter McMurtry, B.Com, CFA
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|McMurtry Investment Report – Portfolios (October 2019)|
|Cash||Alterna Bank – High Interest Savings (2.05% current )||Alterna Bank – High Interest Savings (2.05% current)|
|EQ Bank – High Interest Savings ( 2.30% current)||EQ Bank – High Interest Savings ( 2.30% 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|
|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||3.98||Royal Bank RY||3.98|
|Bank of Montreal BMO||4.29||Bank of Montreal BMO||4.29|
|Intact Financial IFC||2.25||Intact Financial IFC||2.25|
|TD TD||3.84||TD TD||3.84|
|Sun Life SLF||3.65||Sun Life SLF||3.65|
|JP Morgan JPM US||3.15||JP Morgan JPM US||3.15|
|Bank of America BAC US||2.54||Bank of America BAC US||2.54|
|Morgan Stanley MS US||3.44||Morgan Stanley MS US||3.44|
|T. Rowe Price TROW US||2.77||T. Rowe Price TROW US||2.77|
|PNC Fin’l PNC US||3.29||PNC Fin’l PNC US||3.29|
|Energy||Suncor SU||4.21||Suncor SU||4.21|
|Canadian Natural Resources CNQ||4.39||Canadian Natural Resources CNQ||4.39|
|Freehold FRU||8.99||Freehold FRU||8.99|
|Pembina Pipe Lines PPL||5.06||Pembina Pipe Lines PPL||5.06|
|Enbridge ENB||6.37||Enbridge ENB||6.37|
|Trans Canada TRP||4.37||Trans Canada TRP||4.37|
|Whitecap Resources WCP||8.40||Whitecap Resources WXP||8.40|
|Parex Resources PXT||0.00|
|Materials||Agnico Eagle AEM||0.94||Agnico Eagle AEM||0.94|
|Franco Nevada FNV||1.06||Franco Nevada FNV||1.06|
|VanEck Vectors Gold ETF GDX US||0.37||VanEck Vectors Gold ETF GDX US||0.37|
|Osisko Metals OM.V||0.00|
|iShares Global Gold ETF XGD||0.59|
|Industrials||Toromont TIH||1.66||Toromont TIH||1.66|
|NFI Group NFI||6.17||NFI Group NFI||6.17|
|Air Products APD US||2.17||Air Products APD US||2.17|
|WSP Global WSP||1.88||WSP Global WSP||1.88|
|United Technologies UTX US||2.13||United Technologies UTX US||2.13|
|United Rentals URI US||0.00|
|Aecon Group ARE||3.29||Aecon Group ARE||3.29|
|Honeywell HON US||2.05||Honeywell HON US||2.05|
|TFI Int’l TFII||2.53||TFI Int’l TFII||2.53|
|Consumer Discretionary||Home Depot HD US||2.40||Home Depot HD US||2.40|
|Amazon AMZN US||0.00|
|Lowes LOW US||2.03||Lowes LOW US||2.03|
|Communication Services||Rogers B RCI.B||3.10||Rogers B RCI.B||3.10|
|Alphabet GOOGL US||0.00|
|Consumer Staples||Alimentation Couche- Tard ATD.B||0.62||Alimentation Couche Tard ATD.b||0.62|
|Loblaws L||1.68||Loblaws L||1.68|
|Constellation Brands STZ US||1.59||Constellation Brands STZ US||1.59|
|Sysco SYY US||1.99||Sysco SYY US||1.99|
|Unilever PLC UL US||3.02||Unilever PLC UL US||3.02|
|Technology||Apple AAPL US||1.36||Apple AAPL US||1.36|
|Microsoft MSFT US||1.49||Microsoft MSFT US||1.49|
|Open Text OTEX||1.73||Open Text OTEX||1.73|
|Paychex PAYX US||2.87||Paychex PAYX US||2.87|
|Cisco CSCO US||2.93||Cisco CSCO US||2.93|
|Logitech Int’l LOGI US ADR||1.82||Logitech Int’l LOGI US ADR||1.82|
|ETFMG Prime Cyber Sec. HACK US||0.22|
|Visa V US||0.57|
|Utilities||Algonquin Power AQN||3.98||Algonquin Power AQN||3.98|
|Northland Power NPI||4.57||Northland Power NPI||4.57|
|Fortis FTS||3.36||Fortis FTS||3.36|
|Healthcare||Abbott Labs ABT US||1.58||Abbott Labs ABT US||1.58|
|Becton Dickinson BDX US||1.23||Becton Dickinson BDX US||1.23|
|Merck MRK US||2.61||Merck MRK US||2.61|
|United Healthcare UNH US||1.95||United Healthcare UNH US||1.95|
|CVS Healthcare CVS US||3.23||CVS Healthcare CVS US||3.23|
|Danaher DHR US||0.49|
|Thermo Fisher Scientific TMO US||0.26|
|Straumann ADR SAUHY US *||0.63|
|Real Estate||Cdn Apt. REIT CAR.un||2.40||Cdn. Apt. REIT CAR.un||2.40|
|CT Reit CRT.un||4.97||CT Reit CRT.un||4.97|
|US Real Estate SPDR XLRE US||2.90||US Real Estate SPDR XLRE US||2.90|
|InterRent REIT IIP.un||1.77||InterRent REIT IIP.un||1.77|
|Dream Industrial DIR.un||5.17||Dream Industrial DIR.un||5.17|
|Summit REIT SMU.un||4.05||Summit REIT SMU.un||4.05|
|European Equity||iShares MSCI Europe XEU||3.56||iShares MSCI Europe XEU||3.56|
* Be careful purchasing and selling Straumann ADR’s as it is very illiquid. Always use a limit order.
|McMurtry Investment Report – Sector Weights (October 2019)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix (Oct. 2019)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Regular||20.00||10.00|
|Bonds – High Yield||5.00||5.00|