Full episode: Market Call Tonight for Monday, December 4, 2017
Hap Sneddon, chief portfolio manager and founder of Castlemoore
FOCUS: Technical analysis and macro portfolio strategy
The current market structure reflects a positive pro-growth view with financials, energy, materials and industrials showing strong relative strength and defensives, and interest rate sensitive sectors such as utilities, consumer staples and consumer discretionary showing weaker relative strength. Technology and health care are somewhere in the middle for now.
Part of the underpinning for this situation is based on economic data and part from the cues from global central bankers to investors that rates are going higher. GDP prints in Canada and the U.S. have been decent as of late, though we and now Governor Poloz expect some weakening ahead in Canada due to the strength of the loonie over the spring and summer months. This said, Deputy Governor Wilkins recently, and again, talked up accelerating future economic activity.
Housing has paused in Canada and bounced up under the 2007 highs in the U.S. In both countries employment gains have been positive, though the data is still underwhelming for both when it comes to wage increases. Net-net we are still not yet seeing inflation pick up to warrant a continuing full steam ahead on rates. However, markets have price higher costs for now, and this is to be respected.
Eventually, rising rates without clear, persistent and meaningful increases in business activity and wages despite good corporate profits has the potential to negatively impact both businesses and consumers as they adjust. Time will tell how this second phase of central bank experiments plays out. If we are yet early for rate normalization there will be opportunities in defensive and interest rate sensitive securities over the next two quarters.
Intermediate market indicators, including the last holdout, the advance/decline lines, have turned positive. Though some short-term indicators are extended, making them susceptible to near term downside (i.e. U.S. tax passage hangover), any weakness will be temporary in what will be a robust and surprising run to some through Q2/18.
NOTE: The selections are six month selections (not our usual one year) due to our negative forecast eight months (+/- month) for the overall market.
ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO)
At the core of the pro-growth investment theme and global central bank rate increases, industrial or base metals offer one of the best upsides in the next six months, as investors growth more bullish on the outlook for supply and demand. Increased infrastructure activity, dwindling stockpiles and low new mine builds provide tailwinds into 2018. Using an ETF reduces individual company execution risk and broadens exposure by region and commodity. Investors seeking alpha may prefer to create a basket of First Quantum Minerals (FM.TO), Hudbay Minerals (HBM.TO), Sherrit International (S.TO), Teck Resources (TECKa.TO) and Lundin Mining (LUN.TO). Last purchased July 14, 2017 at $11.56.
KELT EXPLORATION (KEL.TO)
The energy sector is also showing improving relative strength against other industries and the index itself, and Kelt, a mid-tier company focused on the exploration, development and production of crude and natural gas, offers strong upside through the cycle. Kelt, led by a team that sold Celtic in 2013 to Exxon for US$3B, recently showed it is focused on the right things, with robust cash flow and scalable exposure with a basket of emerging plays. Next resistance is around $7.50; passing this will see minor resistance at $8.50 on the way to the intermediate target of $10.00. Investors seeking more safety may look at Suncor, then an ETF in the sector, to capture the sector move albeit with lower volatility and performance potential. Last purchased May 17, 2017 at $7.18.
BANK OF AMERICA (BAC.N)
In the U.S. banking space, preference should be given to the large money-centered, universal banking model, with various silos of growth and increased potential from economies of scale. From the recent quarterly earnings announcement in October. investors saw improved revenue growth and operating leverage, as well as better credit cost increases. A breakout past US$25.80 acts as support, with the first upside in the mid-30’s. Last purchased November 27, 2017 at US$26.60.
PAST PICKS: OCTOBER 28, 2016
- Then: $9.23
- Now: $9.27
- Return: 0.43%
- Total return: 5.84%
- Then: $33.55
- Now: $29.10
- Return: -13.26%
- Total return: -6.51%
- Then: $106.90
- Now: $143.51
- Return: 34.24%
- Total return: 35.23%
TOTAL RETURN AVERAGE: 11.52%
CastleMoore Canadian Equity
Performance as of: September 30, 2017
3 Month: 3.08% fund, 2.98% index
3 Year: 13.29% fund, 4.5% index
Average annual return: 9.23% fund, 6.07% index
Drawdown: -4.12% fund, -8.27% index
Recovery speed: 5.2 months fund, 15.7 months index
**Based on reinvested dividends
TOP HOLDINGS AND WEIGHTINGS
- AGF Management: 7.4%
- Avigilon: 7.1%
- Suncor Energy: 6.8%
- The Stars Group: 6.6%
- Kelt Exploration: 6.5%