Oct 10, 2018

Cameron Hurst's Top Picks: Oct. 10, 2018

BNN Bloomberg

Cameron Hurst , BNN Bloomberg

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

MARKET OUTLOOK

Weak emerging markets as a leading indicator for what we see as a global liquidity problem – check!
Ultra-easy credit, peak debt issuance and record low corporate credit spreads – check!
An amazing new industry that promises incredible investment returns over ultra-short timelines (don’t mind the fact that the companies have virtually no revenue) – check!
Negative global growth revisions – check!

What more do investors need to see to understand that we’re in the late-stages of a bull market and it’s time to be disciplined with stops and exits? This is absolutely not the time to chase this cycle’s get-rich-quick investing trends like cannabis.

Think back to the late nineties and recall that people were buying anything with a dot-com in the name because it was a “guaranteed” IPO homerun and quick flip. Exactly the same feverish mentality has captured investors’ imaginations in 2018 and, sadly, we know how this mad rush for cannabis stocks will end. Perhaps the best example yet is Tilray (TLRY.O), which as of this writing had a market cap of US$12 billion and projected 2018 revenue of just US$42 million. That’s a cool 287-times multiple on sales. The company has no earnings, no cash flow to speak of and yet at one point for less than a day the company was worth about US$28 billion.

Euphoria can always last longer than seems plausible, but we’re heading into earnings season when corporate results and particularly guidance tend to set the tone. If PPG’s guidance on Tuesday was any indication, investors should expect to hear a lot more about incrementally bearish themes, namely, weak demand from China, tariffs and trade challenges and energy and related commodity cost inflation.

Looking specifically at Canada, it bears highlighting how disappointing the Canadian market’s reaction was to resolving NAFTA risk. The loonie managed a meagre two-day rally and basically hasn’t stopped falling since a couple days after the announcement. Equities, having apparently missed the memo about a robust energy backdrop, are actually negative month-to-date and continue to break successive technical support levels, including the 50-day and 200-day moving averages and several prior lows.

Not surprisingly, we continue to be very concentrated in U.S. equities, as it represents one of the few leadership areas globally. Even there, however, we have experienced several technical exits in the last two weeks as our strategy remains unemotional and exits positions that break our technical rules.

One of the themes our research team flagged almost exactly a year ago was the risk that both bonds and stocks could fall at the same time in 2018. While it took longer to play out than expected, it seems we’re now faced with exactly that challenge. Accordingly, our fixed income exposure is focused on government bonds with short duration, which is intended to limit losses from higher rates while still providing yield.

In this difficult investing environment, we continue to advocate for private equity garnering a higher share of investors’ total portfolios, particularly in the area of real estate development. Energy is well supported fundamentally and technically at present and has also risen in weighting as a result. However, cash is now close to 20 per cent as a result of the exits and fewer attractive risk/return opportunities in sight. We may not be fully into a corrective phase just yet, but investors should be preparing for a period of lower returns and enhanced conservatism, lest their profits go up in smoke during the second coming of the dot-com bust.

TOP PICKS

ISHARES U.S. MEDICAL DEVICES ETF (IHI)

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

ALERIAN MLP ETF (AMLP.N)

We're positive on energy and like the secular and cyclical tailwinds currently supporting MLPs.

MICROSOFT (MSFT.O)

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

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

PAST PICKS: OCT. 10, 2017

SPDR S&P BIOTECH (XBI.N)

Then: $87.63
Now: $87.61
Return: -0.2%
Total return: 0.2%

ISHARES MSCI GERMANY ETF (EWG.N)

Then: $32.69
Now: $28.30
Return: -13%
Total return: -11%

E*TRADE FINANCIAL (ETFC.O)

Then: $43.99
Now: $52.35
Return: 19%
Total return: 19%

DISCLOSURE	PERSONAL	FAMILY	PORTFOLIO/FUND
XBI	N	N	N
EWG	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: Sep. 30, 2018