McMurtry Investment Report Portfolios – October 2020

Also available in PDF: MIR Portfolios October 2020

Investment Commentary October 2020

US Yield Curve

The ten year minus 2-year US Treasury yield curve remains under 60 basis points, approximately the same as last month. This level is low historically.

US Corporate Debt Spreads

As of the end of September the spread has widened somewhat to 274 basis points from 239 in August. This level is still significantly below the recent high of 440 basis points.

US / China Trade Issues

These issues continue to escalate and this trend is expected to continue into the US election this fall.

Covid – 19 Health Stats

The colder weather combined with a return to school is causing the global daily number of cases to spike once again, especially in Europe and Canada. The US stats have continued to remain high.

Equity Market Valuations

The PE multiple of the S&P 500 remains historically high at 21 times.

US Domestic Economic Growth

Economic growth is plateauing after showing a strong rebound over the last several months.

US Federal Election

The recent debate was not a good one for Trump, although his recent quick recovery from Covid-19 may give him some sympathy votes. At the moment Biden and the Democrats are leading by a significant amount, but the real test will be in the Senate on election night.

Central Bank Monetary Policy

Global central bank policies continue to be very accommodating.

Asset Mix

Taking into account the continuing low interest rates of US treasuries and the expectation that the economy is gradually coming out of the recession, I am reducing the cash weight by 5% with the money directed into the US High Yield ETF, XHY denominated in Canadian dollars. The distribution yield is 5.55% and the yield to maturity is 5.64%, considerably more than government bonds.

I am leaving the equity exposure the same as last month at 50% and 60% for the Income and Growth portfolios respectively.

Equity Sector Weights

I am making two major changes from last month. Based on the current low valuation, I am increasing the REIT exposure to market weight from underweight previously. Secondly, I am reducing the energy weight from market weight to underweight. The uncertain global demand outlook will continue to make this sector very volatile. While a typical cyclical pickup in global economic growth will help energy demand over the short term, the long- term trend is clearly not favourable. However, even with my reduction in sector weight, my exposure remains at 90% the benchmark North American weight. As I have mentioned previously, this is to prevent you from getting whipsawed by making too many large equity sector bets.

Individual Equity Changes

In a recent blog I added General Mills to both portfolios in the Consumer Staples sector. The company offers an attractive dividend of 3.25% that is well covered. During its last quarter, the company reported strong organic growth and a continued increase in market share.

I am adding Canadian Pacific to both portfolios in the Industrials sector. The company remains focused on lowering operating costs and improving margins. Both CN and CP remain the two best rails in North America and both are expected to benefit from a pickup in economic growth next year.

In the Reit sector, I am switching out of InterRent into Minto Apartment Reit. Minto trades at a much larger discount to net asset value and its AFFO distribution payout is only 61% compared to InterRent’s 74%. In addition, Minto has been able to only see a very modest reduction in occupancy rates over the last six months ending June 30th, while InterRent’s occupancy rates have sharply declined over the same period.

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

McMurtry Investment Report – Portfolios (October 2020)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (1.20% current )		Alterna Bank – High Interest Savings (1.20% current)
	EQ Bank – Savings Plus ( 1.50% current)		EQ Bank – Savings Plus ( 1.50% 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	iShares XHY.TO US High Yield Cdn. $		iShares XHY.To US High Yield Cdn $
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	4.52	Royal Bank RY	4.52
	Intact Financial IFC	2.30	Intact Financial IFC	2.30
	Brookfield Asset MGT. BAM.A	1.42	Brookfield Asset MGT. BAM.A	1.42
	TD TD	4.98	TD TD	4.98
	Sun Life SLF	3.96	Sun Life SLF	3.96
	JP Morgan JPM US	3.63	JP Morgan JPM US	3.63
	Manulife Fin’l MFC	5.70	Manulife Fin’l MFC	5.70
	Bank of America BAC US	2.92	Bank of America BAC US	2.92
	Morgan Stanley MS US	2.88	Morgan Stanley MS US	2.88
	T. Rowe Price TROW US	2.70	T. Rowe Price TROW US	2.70
	Allstate ALL US	2.31	Allstate ALL US	2.31
Energy	Suncor SU	5.24	Suncor SU	5.24
	Canadian Natural Resources CNQ	7.94	Canadian Natural Resources CNQ	7.94
	Freehold FRU	4.97	Freehold FRU	4.97
	Enbridge ENB	8.26	Enbridge ENB	8.26
	TC Energy TRP	5.80	TC Energy TRP	5.80
	Whitecap Resources WCP	7.13	Whitecap Resources WXP	7.13
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	0.99	Agnico Eagle AEM	0.99
	Barrick Gold ABX	1.12	Barrick Gold ABX	1.12
	Franco Nevada FNV	0.74	Franco Nevada FNV	0.74
	VanEck Vectors Gold ETF GDX US	0.50	VanEck Vectors Gold ETF GDX US	0.50
			SPDR Gold Bullion GLD US	0.00
	BMO Global Base Metals ETF ZMT	2.86	BMO Global Base Metals ETF ZMT	2.86
			Osisko Metals OM.V	0.00
			iShares Global Gold ETF XGD	0.17
Industrials	Toromont TIH	1.55	Toromont TIH	1.55
	Air Products APD US	1.78	Air Products APD US	1.78
	WSP Global WSP	1.73	WSP Global WSP	1.73
	CNR	1.60	CNR	1.60
	Canadian Pacific CP	0.94	Canadian Pacific CP	0.94
	Raytheon Technologies RTX US	3.19	Raytheon Technologies RTX US	3.19
	Stantec STN	1.55	Stantec STN	1.55
	Aecon Group ARE	4.60	Aecon Group ARE	4.60
	Honeywell HON US	2.20	Honeywell HON US	2.20
	TFI Int’l TFII	1.73	TFI Int’l TFII	1.73
Consumer Discretionary	Home Depot HD US	2.13	Home Depot HD US	2.13
	Target TGT US	1.68	Target TGT US	1.68
	Dollarama DOL	0.34	Dollarama DOL	0.34
			Amazon AMZN US	0.00
	Lowes LOW US	1.42	Lowes LOW US	1.42
Communication Services	Rogers B RCI.B	3.74	Rogers B RCI.B	3.74
	Comcast CMCSA US	2.01	Comcast CMCSA US	2.01
	Telus T	4.88	Telus T	4.88
	Shaw Commications SJR.B	4.82	Shaw Communications SJR.B	4.82
			Facebook FB US	0.00
			Alphabet GOOGL US	0.00
Consumer Staples	Alimentation Couche- Tard ATD.B	0.61	Alimentation Couche Tard ATD.b	0.61
	Loblaws L	1.80	Loblaws L	1.80
	Sysco SYY US	2.83	Sysco SYY US	2.83
	General Mills GIS US	3.25	General Mills GIS US	3.25
	Unilever PLC UL US	2.98	Unilever PLC UL US	2.98
Technology	Apple AAPL US	0.70	Apple AAPL US	0.70
	Microsoft MSFT US	1.06	Microsoft MSFT US	1.06
	Open Text OTEX	1.66	Open Text OTEX	1.66
	Paychex PAYX US	3.04	Paychex PAYX US	3.04
	Qualcomm QCOM US	2.16	Qualcomm QCOM US	2.16
	SPDR S&P Semi. ETF XSD US	0.38	SPDR S&P Semi ETF XSD US	0.38
			CGI Inc. GIB.A	0.00
			ETFMG Prime Cyber Sec. HACK US	1.35
			Visa V US	0.59
			Keysight KEYS US	0.00
Utilities	Algonquin Power AQN	4.07	Algonquin Power AQN	4.07
	Capital Power CPX	6.86	Capital Power CPX	6.86
	Northland Power NPI	2.91	Northland Power NPI	2.91
	NextEra Energy NEE US	1.95	NextEra Energy NEE US	1.95
	Fortis FTS	3.66	Fortis FTS	3.66
Healthcare	AbbVie ABBV US	5.37	AbbVie ABBV US	5.37
	Merck MRK US	3.00	Merck MRK US	3.00
	United Healthcare UNH US	1.57	United Healthcare UNH US	1.57
	CVS Healthcare CVS US	3.39	CVS Healthcare CVS US	3.39
	Bristol Myers BMY US	3.04	Bristol Myers BMY US	3.04
			Danaher DHR US	0.33
			Thermo Fisher Scientific TMO US	0.20
			Perkin Elmer PKI US	0.22


Real Estate	Cdn Apt. REIT CAR.un	2.98	Cdn. Apt. REIT CAR.un	2.98
	CT Reit CRT.un	5.70	CT Reit CRT.un	5.70
	Minto Apartment Reit MI.un	2.47	Minto Apartment Reit MI.un	2.47
	Dream Industrial DIR.un	6.16	Dream Industrial DIR.un	6.16
	Granite REIT GRT.un	3.75	Granite REIT GRT.un	3.75
	Summit Industrial REIT SMU.un	4.15	Summit Industrial REIT SMU.un	4.15
European Equity	iShares MSCI Europe XEU	2.45	iShares MSCI Europe XEU	2.45
Emerging Markets	BMO Emerging Markets ZEM	2.34	BMO Emerging Markets ZEM	2.34

McMurtry Investment Report – Sector Weights (October 2020)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	55 % US /45% CDN
Financials	18.15	28.40	9.70	18.15
Energy	5.41	10.80	2.10	6.02
Materials	8.41	15.50	2.60	8.41
Industrials	10.29	12.50	8.30	10.19
Consumer Disc.	8.10	3.50	11.60	7.96
Comm. Services	8.28	5.20	10.80	8.28
Consumer Staples	5.83	4.40	7.00	5.83
Technology	20.15	10.30	28.20	20.15
Utilities	4.30	5.30	3.00	4.04
Real Estate	2.87	3.20	2.60	2.87
Healthcare	8.22	0.90	14.20	8.22
Totals	100.00	100.00	100.10	100.09

McMurtry Invest. Report Asset Mix October 2020)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	25.00	25.00
Bonds – Reg. Bonds	20.00	10.00
Bonds – High Yield	5.00	5.00
Bonds – Tips	0.00	0.00
Preferreds	0.00	0.00
Equities	50.00	60.00
CDN	19.80	24.30
US	24.20	29.70
Europe	3.00	3.00
Emerging Markets	3.00	3.00

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 and Model Portfolios™

McMurtry Investment Report Portfolios – October 2020

Investment Commentary October 2020

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT™

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