Hap Sneddon, chief portfolio manager and founder at CastleMoore Inc.
Focus: Technical analysis and macro portfolio strategy
The evidence is indisputable that in the long-term asset values are stretched, especially when compared with productivity (GDP). And as we have publically stated for nine years, deflation, the most underreported focus of central bankers, has been the primary driver of policy and markets.
However, these imbalances and others, such as global debt levels, can last for quite a while before things break. Extended conditions are not a timing indicator in and of themselves; they just exist in the background until they matter. This said, the longer-term technical analysis forecast does point to a trend change for equity markets in 2018, suggesting an alignment of the aforementioned fundamental challenges with the price action.
Portfolios account for this underlying risk in delivering absolute (versus relative) returns through the maintenance of stop losses on all positions and through the monitoring of portfolio convexity or the mix of, and rotation between, pro-growth and defensive positions. Temporal economic optimism and rising interest rates favour financials, industrials, base metals, materials and technology through the end of the year, while defensives, such as bonds, utilities and staples, which have had good runs, will be susceptible to lower valuations in the months ahead and should be underweighted.
Our current forecast calls for substantial mid-term strength that will get a tailwind from investors chasing prices and absorbing another zombie inflation narrative (it cannot die). In fact, the inflation narrative may well come and stay alive this time because rates are rising.
As we wade through this bullish phase, maximizing the opportunity presented, CastleMoore will be preparing well before Q1/18 for the final act that rationalizes the imbalances that began in 2000, resurfaced in 2008, and have grown even larger to the present day. This reconciliation ultimately sets the stage for a true and broad secular bull market.
AGF MANAGEMENT (AGFb.TO) – Last purchased on April 19, 2017 at $6.65
AGF has struggled in recent years as a result of poor performance and a lacklustre product offering. Instead of relying on manufacturing relevant products for investors, particularly lower-cost ETFs, the company has remained committed to its third-party distribution channel. However, the company has shown that is has begun to turn things around. This better-late-than-never sea change and sector rotation in financials is also reflected in the technical picture, which went short-term positive in April and mid-term in June. Another tailwind just may be that suitors are waiting in the wings to offer shareholders a nice bid for the assets under management. Target $14.50.
ACCENTURE PLC (ACN.N) – Last purchased on July 5, 2017 at $124.42
Accenture, a leading IT service provider of management consulting, technology services, and general outsourcing, has a wide moat protecting its business. The deep nature of its relationships with its communications, media, technology, financial services, health, public services, products and resource clients improves business efficiency, value, and growth prospects. They provide essential function for large global businesses and thus are at the leading edge of knowing when and what to deliver to them. Capital spending has been anemic but not on the services Accenture provides. The stock has index-like attributes — low beta, quick recovery etc. — but its performance runs well above the S&P 500. Target $168.
ISHARES S&P/TSX GLOBAL BASE METALS INDEX ETF (XBM.TO) – Last purchased on June 5, 2017 at $11.03
Base metals have been in a downtrend since the beginning of 2011, and hence have presented only periodic trading opportunities, if any at all. Today, when the nascent and intended inflation narrative afoot is combined with the downtrend break that occurred in June, a significant investment opportunity is presented with decent downside protection. Most constituent companies are generating good cash flow, have been monitoring balance sheets closely and been dealing with supplies prudently. It becomes a sell when the inflation story busts. Target $24.
PAST PICKS: MAY 26, 2016
MDA CORP. (MDA.TO)
- Bought on April 19,2016
- Sold on July 7, 2016
- CastleMoore Total Return: -4.1%
- Then: $85.38
- Now: $65.61
- Return: -23.15%
- TR: -21.15%
- Bought on April 16, 2015
- Sold on September 22, 2016
- CastleMoore Total Return: 0.5%
- Then: $34.43
- Now: $33.54
- Return: -2.58%
- TR: +1.19%
- Bought on July 20, 2011
- Sold on November 10, 2016
- CastleMoore Total Return: 89.2%
- Then: $60.73
- Now: $58.70
- Return: -3.34%
- TR: +2.52%
TOTAL RETURN AVERAGE: -5.81%
FUND PROFILE: CASTLEMOORE CANADIAN EQUITY
PERFORMANCE AS OF MARCH 31, 2017:
- 3 months: Fund* 2.44%, Index** 1.70%
- 3 years: Fund* 16.52%, Index** 8.46%
- Mean drawdown: Fund* -4.12%, Index** -8.27%
- Mean recovery (months): Fund* 5.2, Index** 12.0
* Returns are net of fees
** Index: TSX
TOP HOLDINGS AND WEIGHTINGS
- Open Text: 7.1%
- Canadian Apartment REIT: 6.9%
- Saputo: 6.4%
- Suncor Energy: 6.3%
- Wajax Corp: 6.3%