Full episode: Market Call for Wednesday, July 10, 2019
Cameron Hurst, chief investment officer at Equium Capital Management
Focus: U.S. equities
The crux of Equium Capital’s investment philosophy centres around finding the most suitable equilibrium between risk and return given the prospective global market environment. Simply put, our chief goal is to understand what’s happening in markets and position portfolios appropriately to first protect capital and then earn a reasonable long-term return for our clients.
During much of the investing lifecycle, assessing risks and constructing well-balanced portfolios is fairly straightforward. However, this simply isn’t the case during turning points in the cycle. Faced with a long list of contradicting indicators, investors must now determine whether it’s time to turn the ship in preparation for a storm or ignore the gathering clouds and continue sailing in the open water.
President Trump extended the natural length of this bull market with his tax cuts, propelling corporate profits to record highs in 2018. But the sugar high was short lived and managements are struggling to produce any earnings growth at all against a backdrop of tariffs, geopolitical tensions and tighter monetary policy. Street consensus for year-over-year Q2 and 2019 earnings growth are both virtually flat. Adding corporate buybacks, which would better support long-term economic expansion if reallocated to capital expenditures, only yields earnings per share growth for the S&P 500 of about 2 to 3 per cent for all of 2019.
Somewhat counter-intuitively, this can be positive for certain sectors of the market, such as real estate. Low-but-positive growth isn’t the end of the world because it enables focused investment yielding reasonable risk-adjusted returns. To this end, Equium Capital’s portfolios remain “barbelled” across secular growth (software and fintech) and defensives with growth (real estate and staples). Equities in aggregate are only modestly over neutral at 64 per cent, but more than enough to participate in a rising market. Balancing this, portfolios hold 32 per cent fixed income, almost entirely in medium-to-short duration government issues.
Fear is easily inspired these days. One need only enumerate the myriad indicators suggesting caution, most notably global PMIs in contractionary territory. And while we note the New York Fed’s recession indicator, itself an aggregation of signals suggesting the gathering storm clouds are no joke, our process continues to position for another six to 12 months of positive returns.
In that context, it is worth highlighting our process finally added gold exposure a month ago as central banks revealed their more dovish inclinations, driving inverted yield curves and negative rates around the globe. So clearly balance is warranted and we continue to view a barbell approach as the most prudent.
We maintain the market environment is more aligned with late-stage than mid-cycle timing and accordingly use real estate to balance portfolio risks, particularly on interest rates.
We are positive on technology and, specifically, the mobile payment and software subindustries, which are benefitting from secular growth trends and strong technicals.
We are positive on Switzerland as the technical picture is one of the best in Europe, where cyclical fundamentals appear to be bottoming.
PAST PICKS: JULY 11, 2018
ISHARES U.S. MEDICAL DEVICES ETF (IHI.O)
- Then: $204.61
- Now: $243.40
- Return: 19%
- Total return: 19%
CME GROUP (CME.O)
- Then: $165.43
- Now: $203.45
- Return: 23%
- Total return: 26%
REAL ESTATE SELECT SECTOR SPDR FUND (XLRE.N)
- Then: $33.03
- Now: $38.00
- Return: 15%
- Total return: 19%
Total return average: 21%
Equium Global Tactical Allocation Strategy
Performance as of: June 30, 2019
- 1 month: 1.0% fund, 2.5% index
- 1 year: -0.8% fund, 3.9% index
- Inception (Nov. 2, 2017): 0.4% future, 7.7% index
Index: S&P/TSX Composite. Returns are net of fees.
TOP 5 HOLDINGS AND WEIGHTINGS
- iShares Canadian Short-Term Bond Index ETF: 15.7%
- iShares 1-3 Year U.S. Treasury Bond ETF: 13.4%
- iShares S&P 500 Index Fund CAD Hedged: 10.4%
- ETFMG Prime Mobile Payments ETF: 10.0%
- Cash and equivalent: 6.8%