Apr 10, 2019

Cameron Hurst's Top Picks: April 10, 2019

BNN Bloomberg

Cameron Hurst , BNN Bloomberg

Cameron Hurst, chief investment officer at Equium Capital Management
Focus: U.S. equities

MARKET OUTLOOK

The firm’s market outlook is quite balanced at present. Investor focus remains on U.S.-China trade negotiation, Brexit, the outlook for global economic growth and the recently inverted yield curve, thus offering reasons to be both optimistic and concerned with the near-term market landscape.

Given slowing global economic growth and well-evidenced in negative U.S. earnings revisions, investors have turned their attention to monetary authorities, who in the past few months have turned far more dovish than expected.

Expectations for growth, inflation and interest rates have been marked down sharply. However, the Federal Reserve continues to reduce the size of its balance sheet, meaning liquidity is still contracting.

These developments along with inversion of the Canadian and U.S. yield curves which has been historically a strong predictor of recessions, ground our view to a cautious stance. Above all, our fundamental view remains that risk assets will struggle to make new highs and volatility will remain elevated while global liquidity contracting and growth is slowing.

In the context of this complicated environment we’re nonetheless able to find compelling opportunities to deploy capital, though fewer of them. Leaders continue to outperform, notably global medical equipment companies, North American IT software and services, U.S. midstream energy, global fintech and North American real estate.

Moreover, there are reasons to believe bond markets have overreacted and Fed Chairman Jerome Powell’s comments might have been interpreted as more dovish than intended. If this is the case, we believe that any uplift in monetary authorities’ indications will likely be met with positive growth commentary, extending the outlook for the economic cycle and causing bonds to sell off.

Accordingly, we believe a balanced approach is prudent for the immediate future. Focused risk asset exposures should allow the portfolio to continue participating, with improving valuations while tactical fixed income exposure, which finally earns some kind of return, brings ballast to the portfolio and respects the late stages of this market cycle and inverted yield curve.

TOP PICKS

VANGUARD FTSE EMERGING MARKETS ETF (VWO)

We shifted positive on emerging markets at the end of fourth quarter as the basket technically broke out to the upside and global liquidity conditions flipped from moving tighter to more loose. Just as we were negative on emerging markets as the Fed and other central banks were tightening monetary conditions for most of 2018, the significant reversal across almost all monetary authorities makes emerging markets far more attractive.

China is the key input to this outlook not only for its direct exposure, but also for the indirect impact of its infrastructure investments, intra-regional trade and commodity demand. After a period of tightening credit conditions, the People’s Bank has injected liquidity and lowered reserve ratios while fiscal authorities have lowered tax rates and built in other economic stimulus measures. Although we don’t expect a significant bounce back in activity, we do expect sequential improvement through 2019. We also expect a U.S.-China trade deal in the second quarter that that, while not substantive, will likely lift a significant headwind to global trade activity.

So long as liquidity and credit trends remain positive and global economic growth trends continue to improve, emerging markets equities should remain a key beneficiary.

ETFMG PRIME MOBILE PAYMENTS ETF (IPAY.N)

We are positive on Technology and specifically the Mobile Payment and Software sub-industries, which are benefitting from secular growth trends and strong technicals. The key thesis across the basket is the global shift from cash to digital payments, which is driving significant secular growth for all players (over 20 per cent earnings per share growth). Non-cash transactions are estimated to grow at a compound annual growth rate of over 13 per cent for the next five years and to reach $726 billion by 2022. There remains significant market share, as cash still represents 32 per cent of transactions in the U.S. and closer to 50 per cent across the OECD.

We like the basket approach as we have very high conviction in the secular trend, but have far less confidence in the specific long-term winners.

REAL ESTATE SELECT SPDR ETF (XLRE.N)

We maintain the market environment is more aligned with late-stage than mid-cycle timing and accordingly are using real estate to balance portfolio risks, particularly on interest rates. If we’re wrong, incremental defensive exposure like with real estate will work better in mid-cycle than other bond proxies like utilities owing to its modest pro-cyclical tilt.

We prefer broad-basket sector ETF exposure through XLRE over the industry-standard IYR owing to lower cost and preferential industry weightings towards secular growth themes, namely data centres, storage and towers.