Nov 12, 2018

Cameron Hurst's Top Picks: Nov. 12, 2018

BNN Bloomberg

Cameron Hurst , BNN Bloomberg

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

MARKET OUTLOOK

This may be the shortest comment we have produced in a while because we feel the market setup is more straightforward at present. Of all the conditional factors we look at to gauge sentiment and market risks, virtually none suggest now is the time to be adding exposure.

To name a few of the higher-efficacy macro/conditional factors we watch, the relative strength of asset managers, semis, transports and small caps are all at or near lows. For background, odds of success increase when positive price action is confirmed by new highs in relative strength. Accordingly, new relative strength lows are a warning sign that now is not the time to be adding exposure.

Credit, for a long time a market indicator we’ve flagged, continues to demonstrate weakness as peak issuance was met with widening corporate credit spreads. Indeed, late October saw new recent wides in both high yield and investment grade credit, so it’s not isolated.

On earnings, the U.S. dollar is getting stronger, which is a headwind for earnings. While it appears S&P 500 earnings per share (EPS) growth will be comfortably in the mid-20 per cent range this year, it appears the implied margin expansion baked into consensus 2019 and 2020 numbers is overly ambitious. Goldman Sachs recently revised their forward numbers down for exactly this reason and we expect others to do so over the coming three months. 5 to 6 per cent EPS growth in 2019 isn’t terrible, but it’s hard to justify a higher market on that basis, particularly when global PMIs are almost all decelerating.

Also telling, our process-driven tactical allocation strategy added 20 per cent in fixed income over the last quarter, all short-dated North American government bond exposure, while equity weight declined by about 35 per cent, leaving cash higher. The equity exposure, heavily tilted toward U.S. health care, holds the least Canadian and international exposure as at any point in the fund’s history. While some markets outside the U.S. still look attractive like Norway, these are few and far between.

Unfortunately, Canada is technically weak and fundamentally challenged by rising rates pressuring an over-leverage consumer. Canadian banks have quietly been draining liquidity from the system and now the growth in total household credit is below the level experienced during the financial. We suspect this is being done in anticipation of coming credit challenges, mostly related to consumer and mortgage credit strain, but nonetheless it will ultimately contribute to the problem. In short, be very careful investing in Canadian equities for the foreseeable future.

TOP PICKS

ISHARES US MEDICAL DEVICES ETF (IHI)

Stable end market fundamentals and new product launches (cardio and diabetes) should boost revenues and support the sector.

UTILITIES SECTOR SPDR FUND (XLU)

This is our insurance policy; Utilities offer defensive protection in a volatile market.

MICROSOFT (MSFT.O)

We are neutral on technology, but software continues to perform well. We like Microsoft's defensive business model.

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

PAST PICKS: NOV. 7, 2017

BECTON DICKINSON & CO. (BDX.N)

Then: $221.27
Now: $240.33
Return: 9%
Total return: 10%

DOWDUPONT (DWDP.N)

Then: $71.14
Now: $58.16
Return: -18%
Total return: -16%

E*TRADE FINANCIAL (ETFC.O)

Then: $43.62
Now: $52.21
Return: 20%
Total return: 20%

Total return average: 5%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
BDX	N	N	Y
DWDP	N	N	N
ETFC	N	N	N

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.

We launched the Equium Global Tactical Allocation Fund with A & F Class units in April 2017, adding an ETF Class in November 2018. The ETF of our fund, ticker symbol ETAC, trades on the Toronto Stock Exchange and is available to all Canadian investors.

Performance as of: Nov. 8, 2017