Cameron Hurst's Top Picks: March 6, 2019

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

MARKET OUTLOOK

There are times in the market when things just seem to balance out. Often after a period of pronounced volatility, such as the major drawdown in Q4 and subsequent relief rally of the last two months, markets can enter a period of digestion. With notable reasons for both optimism and caution, we find ourselves relatively more balanced than usual.

Noting our strategy has portfolios very modestly overweight equities and underweight fixed income would suggest now is not the time to be leaning aggressively one way or the other. Instead, pick your spots and focus exposures in areas of durable market leadership knowing that we could be in for a few minor pullbacks as the market digests a 19 per cent rally from Christmas Eve to March 5, which is remarkable by any measure.

Over the coming couple months we should see a resolution either higher or lower and will tactically reposition accordingly. In the meantime, portfolios should be geared to participate, but from a place of safety and taking only calculated investment risks.

What keeping us positive and engaged in risk assets?

• Monetary policy and liquidity tightening reversed course hard, most notably at the Fed, but also at the European Central Bank.
• Global trade tensions appear to be moderating with the U.S. and China finding a middle ground.
• Chinese authorities are supporting the market and the economy is showing signs of stabilization.
• Valuations are not outlandish.

What are we watching more carefully for negative developments?

• Decelerating global growth.
• Market pundits are already talking about the Fed being done with balance sheet reductions by September, so an extension of this on more positive economic data could be hard on the market because of liquidity implications.
• Credit spreads haven’t tightened back and there’s a record proportion of investment-grade debt one rating cut from junk at the same time as the spread between two-year and five-year U.S. Treasuries (which is the most economically sensitive) has gone negative.
• Chinese trade issues, while improving, aren’t yet resolved and President Trump has demonstrated he’s as happy to set up a meeting as he is to walk out on one. We want to see dry ink on an agreement before relaxing about trade.
• Our conditional factors are presently mixed, notably with asset managers and transports showing weak relative strength and U.S. political risks increasing.

Broadly speaking, we favour exposures in software, fintech, medical devices and midstream energy within the U.S., but also have roughly 10 per cent allocated to broad-based emerging markets, specifically Brazil.

TOP PICKS

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 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.

ETFMG PRIME MOBILE PAYMENTS ETF (IPAY.N)

Although neutral on tech overall, we’re positive on the mobile payment and software subindustries, 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. We like the basket approach as we have very high conviction in the secular trend, but far less confidence in the specific long-term winners.

ALERIAN MLP ETF (AMLP.N)

We’re neutral on energy, but we like the secular and cyclical tailwinds currently supporting MLPs in addition to AMLP’s attractive 8.2 per cent dividend yield. With continued global demand for oil and increased U.S. exports, American pipeline capacity is now constrained, driving up volumes and giving pricing power back to the pipeline operators. Although oil prices have been volatile, we expect a tighter supply situation as we approach the summer driving season as the Saudis cuts production, Iran exemption waivers roll off and other suppliers (Venezuela, Libya, Nigeria) are challenged to maintain output. We expect a range of US$65 to US$75 for Brent predicated on economic growth slowing, but remaining around trend of 3 per cent.

PAST PICKS: MARCH 19, 2018

ALPHABET (GOOG.O)

• Then: $1,100.07
• Now: $1,167.87
• Return: 6%
• Total return: 6%

EDWARDS LIFESCIENCES (EW.N)

• Then: $139.40
• Now: $170.56
• Return: 22%
• Total return: 22%

E*TRADE FINANCIAL (ETFC.O)

• Then: $56.49
• Now: $49.05
• Return: -13%
• Total return: -13%

Total return average: 5%

FUND PROFILE

Equium Global Tactical Allocation Fund

Equium Capital’s tactical strategy combines the best elements of traditional and alternative investing. The investment team views markets and investments through the unemotional lens of technical analysis and then supports those findings with bottom-up fundamental research. This conservative investment process minimizes risk by allocating capital only when and where managers find compelling risk-return opportunities. Accordingly, portfolios should be better protected during market declines while still participating during market upswings.

Performance as of: March 5, 2019

• 1 month: 1.4% fund, 2.6% index
• 3 months: 2.5% fund, 8.5% index
• 1 year: 0.3% fund, 6.7% index

INDEX: TSX Composite.
Returns are net of fees.

TOP 5 HOLDINGS AND WEIGHTINGS

1. iShares 1-3 Year U.S. Treasury Bond ETF: 12.4%
2. iShares Core S&P 500 Index ETF (CAD Hedged): 10.8%
3. iShares Core S&P/TSX Capped Composite Index ETF: 9.3%
4. iShares Canadian Short-Term Bond Index ETF: 9.1%
5. iShares Expanded Tech-Software Sector ETF: 8.3%

WEBSITE: equiumcapital.com
TWITTER: @equiumcapital