Also available in PDF: McMurtry Investment Report Portfolio – October 2022
Investment Commentary October 2022
US Yield Curve
The 10-2-year US Treasury yield curve remains inverted as of September 30th at a minus 0.39%. Since January 3rd, two- year Treasuries have jumped by 344 basis points led by the sharp increase in the US Federal Funds. On the other hand, ten- year Treasury yields have jumped only 220 basis points, thereby creating an inverted yield curve.
US Corporate Debt Spreads
As of September30, 2022, Baa rated US corporate bond spreads relative to 10-year US Treasuries rose to 2.27%.
Covid – 19 Health Stats
Covid-19 cases in China continue to rise resulting in increased lockdowns of major cities.
Equity Market Valuations
The forward PE of the S& P 500 is currently at just under 17 times.
Central Bank Monetary Policy
US Federal Reserve policy remains very hawkish with no end in sight until domestic US inflation falls sharply from current levels.
Asset Mix
In a blog dated September 16th, I reduced equities by 5% for both portfolios and increased cash levels by the same amount. Based on the market being technically oversold on a short- term basis, I am not reducing equities any further at this time.
Based on the increase in rates, I am increasing 1- year GIC’s by 2% for both portfolios. In this same vein, I am also increasing 1-3 year investment grade corporate bonds by 2.5%. I do not advise purchasing any longer than a one year GIC as the lack of liquidity hurts its long term investment opportunities.
I am eliminating preferreds from both portfolios. Normally rate reset preferreds perform well when interest rates rise. However, this is not the case today with negative total returns being earned. One explanation for this poor performance at this time of rising rates is the fact that preferreds tend to be of inferior quality to many other fixed income investments including investment grade bonds.
I am changing my North American benchmark weights to 55% Canada and 45% US, from last month’s 60% Canada and 40% US.
Equity Sector Weights
I remain overweight Energy, Healthcare, Utilities and Consumer Staples. I remain underweight Financials, Materials, Industrials, Technology, Communications and Consumer Discretionary. Lastly I remain market weight Reits. You will notice that the percentages are changing from last month as a result in the change in my North American benchmark weight as indicated above.
Individual Equity Changes
In a blog dated September 29th, I deleted Apple from both portfolios. The shares have outperformed its peers and are consequently trading at a relatively high valuation. In addition an economic slowdown will hurt consumer spending and consumers represent the largest group in the demand for iPhones.
In a blog dated September 26th, I added Vertex to the Growth portfolio. This company has four drugs to fight cystic fibrosis and is considerably ahead of all its competitors in this regard. The company is showing solid growth in revenues and net income.
On September 22, I deleted both Manulife and Sun Life from both portfolios. Both these life companies are quite cyclical and are getting hurt by both declining security markets and a reduction in business coming from Asia. I recommend proceeds to be redirected back into Intact Financial that is a more defensive financial.
On September 21 in a blog, I deleted both Rogers and Shaw Communications from both portfolios. The federal government’s decision to delay any approval for the Shaw takeover by Rogers until sometime next year creates a lot of uncertainty. I recommended that proceeds be redirected into Telus that has better growth prospects than Rogers and is less cyclical as well without owning any media properties. Telus is investing in non telco businesses such as AI, e-commerce and tele-health.
In a blog dated September 9, I added Sprott Physical Uranium Trust to the Growth portfolio. This investment provides a direct interest in the actual commodity that has very strong growth prospects in the current environment.
In a blog dated September 8th, I added Air Products, the US producer of industrial gases to both portfolios. The company is a global leader in gray hydrogen produced from hydrocarbons. In addition, the company will become a major supplier of blue hydrogen to Imperial Oil’s new facility in Edmonton. The company is also a global leader in LNG technology and equipment.
Lastly, I am deleting Sysco from both portfolios in the Consumer Staples sector. Sysco is trading at a much higher valuation than Kroger while its growth rates are comparable. In addition, Sysco has a much more levered balance sheet.
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