May 8, 2019

Cameron Hurst's Top Picks: May 8, 2019

BNN Bloomberg

Cameron Hurst , BNN Bloomberg

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

MARKET OUTLOOK

The rally off December 2018 lows reflected as much unjustified exuberance as the preceding decline reflected unnecessary pessimism. In other words, both represent extreme reactions that should soon find a more suitable and sustainable middle ground. At the heart of the extreme volatility lies the challenge of forecasting growth at the end of a long cycle with conflicting messages from fiscal and monetary policy leaders.

We pointed out some time ago that markets were latching on to the false premise of growth being robust and sustainable and yet the Fed being increasingly likely to cut rates and further stimulate. The reality may now be coming home to investors that in order for the Fed to become more accommodative, the trajectory of economic growth will have to weaken, which in the absence of a quick and favourable resolution with China, could be nearer on the horizon and desired.

The option-implied probability of a Fed funds rate cut by September, while swinging wildly for two months now, is at 37 per cent and well below the high of 63 per cent in March. This probably sits around a level that suggests there’s reason for caution, but against a backdrop of pretty reasonable economic growth. To be clear, we caution against putting too much weight in option-implied rate probabilities and firmly believe the attention this indicator received recently belies its actual predictive ability. But at present, it seems the indicator reflects a Fed that’s sitting pretty with a slowing but positive growth picture and the ability to pivot either direction as needed. We see that as positive, although not sufficient to induce additional investment.

Acknowledging the late stage of the cycle, our positioning in risk assets remains focused and only modestly above benchmark.

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.

ISHARES MSCI SWITZERLAND ETF (EWL)

We’re positive on Switzerland as the technical picture is one of the best in Europe, where we’re increasingly positive on the cyclical fundamentals. This index is high-quality and defensive, with the health care 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.

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.

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
IPAY	Y	Y	Y
EWL	Y	Y	Y
XLRE	Y	Y	Y

PAST PICKS: MAY 9, 2018

ISHARES U.S. MEDICAL DEVICES ETF (IHI)

Then: $193.52
Now: $223.42
Return: 15%
Total return: 16%

MICROSOFT (MSFT)

Then: $96.94
Now: $125.43
Return: 29%
Total return: 32%

UTILITIES SELECT SECTOR SPDR FUND (XLU)

Then: $49.61
Now: $57.26
Return: 15%
Total return: 19%

Total return average: 22%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
IHI	Y	Y	Y
MSFT	Y	Y	Y
XLU	N	N	N

FUND PROFILE

Equium Global Tactical Allocation Strategy

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. This strategy is presently available in segregated accounts only.

Performance as of: March 31, 2019