McMurtry Investment Report Portfolios September 2024
Also available in PDF: McMurtry Investment Report – September 2024
Investment Commentary September 2024
US Yield Curve
The 10-2-year US Treasury yield curve closed on September 3rd at minus 0.04%, narrowing marginally from the previous month close of minus 0.08%.
US Corporate Debt Spreads
As of August 30th, the Moody’s triple B yield relative to the 10-year Treasury decreased modestly by 2 basis points to 1.69%. This spread remains much lower than the 4.23% registered on March 20, 2020 when Covid started.
China
The Chinese economy continues to remain depressed with the latest second quarter growth of 0.70% being the weakest since the second quarter of 2023. The Governor of their Central Bank refuses to announce any new stimulus packages apart from the recent minor monetary policy change.
Equity Market Valuations
The forward PE of the S&P 500 remains at a relatively high level of 21 times.
US Corporate Earnings
Operating earnings for the S&P 500 are expected to be up 12% this year with a further 14% increase in 20025. Obviously, these top -down numbers do not anticipate an economic recession anytime soon.
Central Bank Monetary Policy
US domestic inflation continues to trend down close to the Federal Reserve’s targets. It certainly appears that the Central Bank has won the war over inflation. However, the Central Bank still has not made any reductions to their discount rate even though the domestic bond market has already responded with lower yields. The focus of the Federal Reserve at this time should now be squarely on the economy and employment. At this moment, it appears that the Federal Reserve may have orchestrated a soft landing. But history has shown that Central Banks have a poor overall track record of avoiding a hard landing.
It is largely for this reason that my asset mix remains relatively neutral towards equities at this time. The Us economy is most definitely slowing down as is employment growth.
Asset Mix- Individual Portfolios
The only major change I am making to the overall asset mix is to change my North American benchmark weight from US 55% Canada 45% to US 60% Canada 40%. This change in effect reduces the cyclical weights somewhat. It also has the effect of increasing my US equity weight relative to Canada. I still do not anticipate an economic recession at this time, but only slower growth.
My recommendation to materially reduce the cash weights for both portfolios by redirecting the proceeds into short and mid duration government bonds is finally starting to pay off nicely. Money market yields are dropping like a stone.
Asset Mix- ETF Portfolios
Similar to the asset mix changes above, I am increasing my US component of my North American benchmark weight to the new level of 60% US and 40% Canada. This change results in an increase in US equities and a reduction in Canadian ones.
Equity Sector Recommendations
I am keeping Financials, Industrials, Materials and Energy as overweight my North American benchmark weight. However, within the Materials sector, I recommend increasing the gold exposure and reducing the copper weight accordingly. Long term the outlook for copper is very favourable, but over the short term the price of the commodity remains in a downtrend.
In regards to the Energy sector, I am maintaining a small overweight. As I expected OPEC has decided to defer their previously announced production increases for at least two months. After that, OPEC may still decide to keep production at current levels should crude prices remain low. On a positive front, US inventories of crude remain at low historical levels. The annual growth rate of US shale production has been trending down for the last six months.
Based on all these developments, crude oil remains in a trading range until there is some improvement in Chinese demand.
Individual Stock Changes
In a portfolio blog dated August 21st, I added the US Gen Z retailer, Abercrombie & Fitch to the growth portfolio in the Consumer Discretionary sector. While the overall rate of consumer spending remains weak, parents continue to spend money on both their teenaged children and their pets. Abercrombie’s same store sales for the 2nd quarter jumped by 18% year over year. The company raised its revenue outlook for the remainder of 2024 and expects to see improved operating margins. In addition, the company has a very healthy balance sheet with no long -term debt.
In a portfolio blog dated August 21st, I added the US defence contractor, Northrop Grumman to both portfolios in the Industrials sector. The company received $1.5 billion of new orders in the 2nd quarter, improving their book to bill ratio to 1.5 times. Operating cash flow rallied by 55% year over year. The company has a solid balance sheet with a debt / equity ratio of 1.14 times. The shares are trading at a forward PE of 20.43 times, a little higher than its 5- year average of 19.20 times. The company offers a dividend yield of 1.60 % that is well covered by cash flow. In addition, the company has increased its dividend per share every year for the last twenty.
In a portfolio blog dated August 27th, I added the Canadian industrial Reit, Nexus Industrial to both portfolio in the Reit sector. This Reit is a small cap one that is trading at a much lower valuation than its larger peers, Granite and Dream Industrial. As its balance sheet is more leveraged than its peers, it has decided to sell off its non core industrial, office and retail properties. The proceeds will be used to materially reduce its debt. Its dividend yield is an attractive 7.59%.
After reviewing all the most recent quarterly earnings of our domestic banks, I have decided to delete Bank of Montreal from both portfolios in the Financials sector. BMO showed very poor earnings that were accompanied by materially higher provisions for bad loans.
My two favourite Canadian banks remain RBC and CIBC that both showed comparatively strong earnings quarters. TD remains in hot water over its US acquisition. However, its quarterly report met consensus estimates. Lower interest rates domestically will help to reduce the probability of major mortgage defaults within the domestic and US banking industry. RBC continues to benefit from its HSBC acquisition.
In the Materials sector, I am adding back the VanEck Gold Miners ETF, GDX-US, to both portfolios in the Materials sector.
Lastly, I am deleting Monster Beverage from the Growth portfolio in the Consumer staples sector. The company is exhibiting weakening growth rates in Revenues, EBITDA and EPS. Its latest quarter was a negative EPS surprise vs consensus estimates of 9.7%.
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