Investment Commentary for 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.
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.
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
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|McMurtry Investment Report – Portfolios (April 2019)|
|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|
|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|
|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 – Sector Weights (April 2019)|
|Equity Sector Weights (%)|
|Sector||My Weight||TSX Comp||S&P 500||55 % US /45% CDN|
|McMurtry Investment Report Asset Mix (April 2019)|
|Asset Mix – Income and Growth Portfolios|
|Bonds – Regular||20.00||10.00|
|Bonds – High Yield||5.00||5.00|