Cameron Hurst's Top Picks: June 5, 2019

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

MARKET OUTLOOK

Inasmuch as investors feel a bit shell shocked from a tough drawdown in May, little has actually changed. China-U.S. trade war rhetoric is still more noise than signal, although odds of a positive outcome have deteriorated on that front in recent weeks. The argument between slow growth and recession remains largely coupled with the outcome of the trade war, so modest progress has been made on that front as well.

Our primary concern is Donald Trump, leader of the “aggressive short game” negotiating school, who is up against China, which unwaveringly follows the ruthless long-game approach. Illustrating this, a notable China follower recently highlighted that China never gives up anything that doesn’t serve its long-term objectives. As it pertains to the trade war outcome, if the U.S. has already run out of short-term bargaining chips with China, it doesn’t bode well for “tariff man” and global growth.

We previously highlighted that markets are late in the cycle and forecasts seem to be inappropriately baking in stable growth and incremental support from the Fed. We argue that investors are likely to get one or the other, not both. Either growth continues to slow, in which case the Fed springs to action with rate cuts, or the economy maintains a reasonable level of growth on an improving trade and geopolitical backdrop, in which case the Fed most likely stays the course or even further reduces accommodation.

It’s reasonable to see the growth trajectory as inextricably linked to the China-U.S. trade war outcome. Watch the G20 in late June as the next major mile marker on trade progress and be mindful not to get distracted by all the noise in the interim. In the meantime, we maintain a barbell approach to portfolio construction. Secular growth stories such as in mobile payments and medical devices fared well in the drawdown), as did defensives like real estate and utilities. If the trade war goes to the next level, the wheels likely fall off the markets and it may well be time for more bonds, cash and maybe even gold. But it’s too early to jump one way or the other; just stick with the process until we get a clear indication of which way the trade war breaks.

TOP PICKS

ETFMG PRIME MOBILE PAYMENTS ETF (IPAY)

We’re 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 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. The top 5 holdings are Mastercard (6 per cent), Paypal (6 per cent), Visa (6 per cent), American Express (6 per cent) and Worldpay (4.9 per cent) with a fairly broad basket of 40 holdings.

REAL ESTATE SELECT SECTOR SPDR ETF (XLRE)

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. If we’re wrong, incremental defensive exposure like this sector 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.

ISHARES MSCI SWITZERLAND ETF (EWL)

We’re positive on Switzerland as the technical picture is one of the best in Europe, where cyclical fundamentals appear to be bottoming. This index is of high quality and defensive, with the healthcare sector at 36 per cent followed by staples at 26 per cent and financials at 17 per cent (half being insurance). Nestle, Roche and Novartis comprise 42 per cent of the index.

We see Switzerland as helping to increase our defensive equity exposure while also reducing our underweight in Europe, which has badly lagged other developed markets over the last several years. Valuation is in-line with five-year averages on both an absolute and relative basis.

PAST PICKS: JUNE 8, 2018

ISHARES US MEDICAL DEVICES ETF (IHI)

• Then: $204.68
• Now: $227.04
• Return: 11%
• Total return: 11%

RAYTHEON (RTN.N)

• Then: $214.56
• Now: $178.86
• Return: -17%
• Total return: -15%

MICROSOFT (MSFT.O)

• Then: $101.63
• Now: $124.90
• Return: 23%
• Total return: 25%

Total return average: 7%

EQUIUM GLOBAL TACTICAL ALLOCATION STRATEGY

• 1 month: -2.3% strategy, -3.1% index
• 3 months: 0.5% strategy, 1.0% index
• 1 year: -1.5% strategy, 3.0% index
• Since inception (Nov. 2, 2017): -0.4% strategy, 3.2% index

Index: S&P/TSX Composite. Results are as of May 31, 2019 and net of fees.

TOP HOLDINGS (AS OF MAY 31)

1. iShares Canadian Short-Term Bond Index ETF: 15.9%
2. iShares 1-3 Year U.S. Treasury Bond ETF: 13.9%
3. iShares S&P 500 Index Fund CAD Hedged: 9.9%
4. ETFMG Prime Mobile Payments ETF: 9.8%
5. Cash & Equivalent: 6.5%
6. Real Estate Select Sector SPDR ETF: 6.4%

WEBSITE: equiumcapital.com
TWITTER: @equiumcapital
LINKEDIN: Equium Capital