McMurtry Investment Report Portfolios – September 2018

Also available in PDF: MIR Portfolios September 2018

Investment Commentary (September 2018)

Equity markets continue to climb a wall of worry.

Rising interest rates and inflationary expectations combined with ongoing global trade wars continue unabated.

However US year over year quarterly profit growth remains at 20% plus. This is a result of a strong domestic economy plus the corporate tax cuts.

It is quite possible that US corporate profit growth may have peaked this year. Next year the year over year benefit from a lower corporate tax rate will be greatly reduced. Slowing global growth plus rising labour rates may well see operating margins start to subside somewhat.

Trump continues his global trade war with China, Canada and the European Union despite his recent photo op with a representative of the EU.

In terms of NAFTA, Trump continues to use his bullying tactics to force Canada to sign on his terms only. These negotiations are really like a poker game. Canada has called Trump’s bluff and awaits a more equitable agreement than was originally put forth.

Trump does have a lot to lose if he cannot sign Canada. The upcoming midterm elections will make the Republicans very vulnerable to losing the majority in the House without at least renegotiating NAFTA. Furthermore if they lose the House of Representatives the probability of Trump being impeached increases significantly.

I am betting that both countries will start compromising just a little in order to get the deal done. As long as neither country gives up too much, the equity markets will probably view this outcome as a win-win for both Canada and the US.

Taking all of these positive and negative factors into account, I am leaving the overall asset mix the same as last month.

However I am removing the Emerging Market XEC ETF exposure with the trade wars between China and the US getting a lot uglier with no resolution in sight.

In terms of equity sectors, I am increasing the REIT weight to market benchmark exposure, while materially increasing my underweight in the Materials sector. The Materials sector continues to get hurt from a rising US dollar and rising US interest rates, combined with negative repercussions from a slowing Chinese economy.

I remain overweight Financials, Energy, Industrials, Consumer Discretionary and Technology.

Despite ongoing domestic pipeline issues that are resulting in the discount between Western Canadian Select and WTI widening considerably once again, the global supply / demand outlook for crude oil is gradually improving. Secondly the Canadian mid cap energy producers are very cheap at current prices and offer solid growth opportunities. The weak loonie relative to the US greenback helps to offset somewhat any price decline from the domestic Western Canadian Select prices.

I remain market weight Healthcare and am going to market weight in the REIT sector.

I remain underweight Utilities, Telcos, Consumer Staples and Materials.

I am not adding any companies or ETF’s at this time.

However I am making several deletions as follows:

I am removing Applied Materials from the Industrials / Technology sector. Apple is a major client and has indicated its desire to develop in house new semiconductor chips.

I am deleting Alibaba from the Consumer Discretionary sector. The ongoing trade wars and a slowing Chinese economy will continue to offer a very difficult environment.

I am deleting the Emerging Market ETF XEC with the ongoing issues with Emerging markets continuing.

Lastly as per this month’s newsletter on Canadian Financials, I am removing Manulife. Sun Life is better positioned and a lower risk way of participating in the domestic lifeco space.

McMurtry Investment Report – Portfolios (September 2018)

	Income		Growth
Cash	Alterna Bank – High Interest Savings (2.05% current rate)		Alterna Bank – High Interest Savings (2.05% current rate)
	EQ Bank – High Interest Savings ( 2.30% current rate)		EQ Bank – High Interest Savings ( 2.30% current rate)
Bonds	iShares XSB Short Term		iShares XSB Short Term
	iShares XFR Floating Rate		iShares XFR Floating Rate
	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
Preferreds	Security	Dividend Yield %	Security	Dividend Yield %
	Enbridge Pfd V Enb.pr.V US	6.20	Enbridge Pfd V Enb.pr.V US	6.20
	Horizons Active Mgt. Pfd HPR	3.78	Horizons Active Mgt. Pfd HPR	3.78
	Industrial Alliance IAG.PR.G	3.94	Industrial Alliance IAG.PR.G	3.94
Common Stocks	Security	Dividend Yield %	Security	Dividend Yield %
Financials	Royal Bank RY	3.70	Royal Bank RY	3.70
	National Bank	3.89	National Bank	3.89
	TD TD	3.47	TD TD	3.47
	CIBC CM	4.48	CIBC CM	4.48
	Sun Life SLF	3.57	Sun Life SLF	3.57
	JP Morgan JPM US	1.95	JP Morgan JPM US	1.95
	Bank of America BAC US	1.94	Bank of America BAC US	1.94
	Citibank C US	2.50	Citibank C US	2.50
	Goldman Sachs GS US	1.35	Goldman Sachs GS US	1.35
	T. Rowe Price TROW US	2.35	T. Rowe Price TROW US	2.35
	iUnits US Regional Banks IAT US	1.64	iUnits US Regional Banks IAT US	1.65
	Keycorp KEY US	2.40	Keycorp KEY US	2.40
	Blackrock BLK US	2.49	Blackrock BLK US	2.49
	Paychex PAYX US	3.25	Paychex PAYX US	3.25
	PNC Fin’l PNC US	2.62	PNC Fin’l PNC US	2.62
			Visa V US	0.61
Energy	Suncor SU	2.63	Suncor SU	2.63
	Freehold FRU	5.41	Freehold FRU	5.41
	Whitecap WCP	3.77	Whitecap WCP	3.77
	Torc TOG	3.78	Torc TOG	3.78
	Pembina Pipe Lines PPL	4.87	Pembina Pipe Lines PPL	4.87
	Enbridge ENB	5.81	Enbridge ENB	5.81
	Vermilion Energy VET	6.86	Vermilion Energy VET	6.86
			Centennial Resources CDEV US	0.00
			Step Energy STEP	0.00
			Parex Resources PXT	0.00
Materials	Agnico Eagle AEM	1.14	Agnico Eagle AEM	1.14
	Franco Nevada FNV	1.35	Franco Nevada FNV	1.35
	BMO Global Base Metal ETF ZMT	2.61	BMO Global Base Metal ETF ZMT	2.61
			Lundin LUN	1.90
			Trevali Mining TV	0.00
			Hudbay Minerals HBM	0.34
			Roxgold ROXG	0.00
Industrials	DowDuPont DWDP US	2.21	DowDuPont DWDP US	2.21
	Toromont TIH	1.38	Toromont TIH	1.38
	WSP Global WSP	2.03	WSP Global WSP	2.03
	Canadian Pacific CP	1.01	Canadian Pacific CP	1.01
	General Dynamics GD US	1.86	General Dynamics GD US	1.86
	SNC Lavalin SNC	2.17	SNC Lavalin SNC	2.17
	Guggenheim Eq WT IND RGI US	1.14	Guggenheim Eq Wt IND RGI US	1.14
	Honeywell HON US	1.87	Honeywell HON US	1.87
	Finning FTT	2.58	Finning FTT	2.58
			Fedex FDX US	1.06
Consumer Discretionary	Home Depot HD US	2.09	Home Depot HD US	2.09
	Sleep Canada ZZZ	2.39	Sleep Canada ZZZ	2.39
	Stanley Black and Decker SWK US	1.77	Stanley Black and Decker SWK US	1.77
	Canadian Tire CTC.A	2.21	Canadian Tire CTC.A	2.21
	Amazon AMZN US	0.00	Amazon AMZN US	0.00
	Kohl’s KSS US	3.30	Kohl’s KSS US	3.30
	Magna MG	2.49	Magna MG	2.49
	Lowes LOW US	1.93	Lowes LOW US	1.93
	Carnival Cruise CCL US	3.38	Carnival Cruise CCL US	3.38
			Dollarama DOL	0.33
Telecom	Rogers B RCI.B	2.80	Rogers B RCI.B	2.80
Consumer Staples	Alimentation Couche Tard ATD.b	0.67	Alimentation Couche Tard ATD.b	0.67
	Loblaws L	1.72	Loblaws L	1.72
	Constellation Brands STZ US	1.42	Constellation Brands STZ US	1.42
	Unilever PLC UL US	3.18	Unilever PLC UL US	3.18
Technology	Apple AAPL US	1.53	Apple AAPL US	1.53
	Microsoft MSFT US	1.58	Microsoft MSFT US	1.58
	Open Text OTEX	1.67	Open Text OTEX	1.67
			Nvidia NVDA US	0.25
			ETFMG Prime Cyber Sec. HACK US	0.11
			Shopify SHOP	0.00
			Alphabet GOOGL US	0.00
Utilities	Algonquin Power AQN	5.14	Algonquin Power AQN	5.14
	Fortis FTS	3.97	Fortis FTS	3.97
Healthcare	Abbott Labs ABT US	1.71	Abbott Labs ABT US	1.71
	Johnson & Johnson JNJ US	2.72	Johnson & Johnson JNJ US	2.72
	Merck MRK US	2.91	Merck MRK US	2.91
	US Healthcare iShares ETF IYH US	1.06	US Healthcare iShares ETF IYH US	1.06
	United Healthcare UNH US	1.42	United Healthcare UNH US	1.42
	Eli Lilly LLY US	2.28	Eli Lilly LLY US	2.28
	CVS US	3.09	CVS US	3.09
			Danaher DHR US	0.64
			Thermo Fisher Scientific TMO US	0.29
			IBB Biotech ETF IBB US	0.27
Real Estate	Cdn Apt. REIT CAR.un	2.87	Cdn. Apt. REIT CAR.un	2.87
	InterRent REIT IIP.un	2.42	InterRent REIT IIP.un	2.42
	Summit REIT SMU.un	5.82	Summit REIT SMU.un	5.82
	Chartwell REIT CSH.un	3.86	Chartwell REIT CSH.un	3.86
European Equity	iShares MSCI Europe XEU	4.39	iShares MSCI Europe XEU	4.39

McMurtry Investment Report – Sector Weights (September 2018)

Equity Sector Weights (%)
Sector	My Weight	TSX Comp	S&P 500	65 % US / 35% CDN
Financials	23.00	34.10	13.80	20.91
Energy	11.00	19.30	5.90	10.59
Materials	3.00	10.20	2.50	5.20
Industrials	10.75	10.50	9.60	9.92
Consumer Disc.	10.86	5.50	12.90	10.31
Telecom	1.75	4.50	1.90	2.81
Consumer Staples	5.00	3.40	6.70	5.55
Technology	20.00	4.00	26.50	18.63
Utilities	1.75	3.80	2.80	3.15
Real Estate	2.81	3.00	2.70	2.81
Healthcare	10.09	1.70	14.60	10.09
Totals	100.00	100.00	99.90	99.94

McMurtry Investment Report Asset Mix (September 2018)

Asset Mix – Income and Growth Portfolios
%	Income	Growth
Cash	37.50	32.50
Bonds	10.00	5.00
Preferreds	15.00	10.00
Equities	37.50	52.50
CDN	11.37	16.62
US	21.13	30.88
Europe	5.00	5.00
Emerging Markets	0.00	0.00

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.

Peter McMurtry, B.Com, CFA
Financial Writer
Objective Investment Advice for Everyone
Monthly Investment Newsletter and Sample Portfolios
Personalized Portfolio Reviews
https://mcmurtryinvestmentreport.ca

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 & Model Portfolios

McMurtry Investment Report Portfolios – September 2018

Investment Commentary (September 2018)

McMurtry Investment Report – Portfolios (September 2018)

McMurtry Investment Report – Sector Weights (September 2018)

McMurtry Investment Report Asset Mix (September 2018)

Investment Commentary (April 2019)

Peter McMurtry, B.Com, CFA

MCMURTRY INVESTMENT REPORT

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