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



As we close out a stellar 2017, the S&P 500 has the opportunity to record its first full calendar year of positive months since before 1987. At the same time, market pundits can’t stop worrying about the duration of the bull market, now the second longest in history, and the recently accelerating churn in high-performing stocks. Looking forward to 2018, we see a curious confluence of market drivers that appear highly likely to make investing more challenging, not less, but it’s still too early to head for the exits.

The Good

  • Absent any tail risk-type event, like North Korea going nuclear, synchronized global growth seems likely to continue supporting robust corporate earnings expansion
  • The Fed appears likely to raise rates 3-4 times in the year, but by only 25bps each round, while continuing their millennial-like impulse of over-communicating every single thought that passes between an FOMC member’s ears [read: slow, steady and well-communicated policy]
  • There is evidence to suggest a nascent virtuous circle is unfolding wherein global growth drove higher business output, in turn tightening the labour market, causing businesses to now look at capital investment, which should correct subdued productivity growth and drive higher growth expectations
  • So it may be late in the cycle, but each phase typically has its own winners, which we see as energy, materials, industrials and possibly financials in this particular cycle
  • In any event, it appears there will be areas of strength to focus on in 2018 even as our capital preservation-focused process finds an increasing number of areas to avoid

The Bad

  • The cycle is definitely showing signs of age — valuations are reasonably full and multiples elevated
  • High valuations tend to stay high for longer than investors expect, so this isn’t a reason to immediately run for the exits
  • We haven’t seen the real drivers of valuations reverse course yet, i.e. excessive liquidity and inexpensive credit, but don’t overlook the fact that central bankers have already stopped refilling the punch bowl — the party doesn’t have that much longer to run
  • When credit and liquidity turn, most likely on the back of higher interest rates, valuations will be highly vulnerable

The Potentially Ugly

  • There is a small but increasing chance the end of this cycle brings a coordinated selloff in both equities and bonds
  • Central banks have done absolutely everything in their power to stoke inflation and we’re likely to see major pain in multiple assets classes if they ever actually deliver because rates will have to catch up
  • Traditional asset management is not well suited to handle high correlation market disruptions, predominantly owing to an inability to move to the side lines and hold cash or dramatically reduce duration of fixed income holdings
  • Interest rate gyrations could hit bonds and bond proxies at the same time as equity valuations mean-revert, so investors not holding a tactical allocation strategy with their core capital could potentially be very unhappy by year-end 2018



  • We like RTN’s specific defense market exposures (missiles, missile defense & cyber) and it’s higher margin international exposure.
  • Defense a beneficiary of tax reform – traditionally high-tax rate payers.
  • Technicals – consolidating. 
  • Positive on the Defense space – DoD budget pivoted towards growth & heightened threat environment globally.
    • DoD focus on missile spending versus ISIS.
    • Robust opportunity set of potential missile defense sales to Poland, Romania, Sweden, Japan, and others.
  • Platform ‘agnostic’ – RTN subcontract into major defense programs but are not main supplier therefore mitigates risk of Trump interference (as seen with Lockheed Martin [F35] & Boeing [Air Force One]).
  • Leader in international defense sales (31 per cent revenue) which are higher margin sales.
    • Foreign Military Sales approvals more than doubled in FY17 – positive trend for the name.
  • Significant balance sheet capacity therefore room for dividend increases and share buybacks.
  • Headwind – Ongoing continuing resolutions a hurdle before defense spending inflects.
  • Trading at premium to peer group average 21.0x (2018 P/E). Believe premium can be maintained:
    • Exposure to defense niches of critical near-term importance.
    • Largest exposure to higher margin Int’l sales.


  • POSITIVE – Materials sector has broken out as base metals have performed well and chemicals names benefit from strong industrial growth.
  • DWDP positively pre-announced their first quarter (Q317) as a merged company although underlying details were more mixed, guidance slightly below consensus and the corporate breakup was delayed by several months. Given the hurricanes and restructuring efforts however near-term estimates are not a good guide and we do not view the delay as material to the thesis.
  • Underlying volume trends have been positive as key end markets continue to post solid growth (plastics, housing, auto, construction) and pricing should be supported by increasing commodity prices.
  • DOW/Dupont merger will result in significant cost synergies (US$3B target could be conservative) and more efficient corporate structure (will be broken into three parts: Ag, Materials, and Specialty that have their own cycles and drivers), which will help crystalize the SOTP argument.
  • DOW is a key beneficiary of the U.S. shale gas boom, which provides it with a cost advantage relative to global peers (specialty plastics).
  • DOW has pushed significantly more towards higher quality consumer facing verticals and away from cyclical industrial and commoditized businesses driving up margins and cash flow in turn resulting in peer & market leading shareholder performance over the last five years.
  • 10x ’18 EV/EBITDA is close to prior peak (DOW) however economic growth and commodity inflation will likely sustain earnings growth while the strategic shift up the value chain, cost savings and break-up of the company into a more efficient structure should lift both estimates and multiple.
  • All in, as long as the economy and inflation show progress and management continues to execute their strategic plan we would expect the stock to move steadily higher over time.


  • POSITIVE – strong cyclical tailwinds and multiple drivers of top line growth
  • Tax reform can be a powerful, although short-term driver of EPS growth
  • Regulatory reform has a longer runway and broader financial sector implications, positively impacting both the credit-sensitive lenders as well as the more rate-sensitive industries
  • Within the Financials sector, the IAI positively focuses on the combination of securities exchanges with the capital markets players like MS, ETFC and BK
  • Securities Exchanges:
    • their lower volatility adds ballast to the ETF because they generate significant revenues from stable and recurring sources like data
    • There’s some element of counter-cyclical revenue because they also benefit from higher exchange volumes, which tend to occur during market stress
  • Capital Markets:
    • Larger firms, like Morgan Stanley, now generate half their revenue from wealth management which is more stable than the tradition trading and syndication businesses
    • Adding to their appeal, wealth management businesses, discount brokers, like SCHW and ETFC, and trust banks like BK & STT carry huge deposit balances that haven’t been contributing to the bottom line when rates were zero – as rates rise these institutions can earn a spread on the balances, so they’re hugely interest rate sensitive





  • Then: $181.05
  • Now: $219.88
  • Return: 21.44%
  • Total return: 22.81%


  • Then: $161.38
  • Now: $186.23
  • Return: 15.40%
  • Total return: 16.46%


  • Then: $149.82
  • Now: $172.66
  • Return: 15.24%
  • Total return: 16.60%




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