Jun 30, 2016

Hap Sneddon's Top Picks: June 30, 2016

Michael Chu, BNN Bloomberg

Hap Sneddon , BNN

Hap Sneddon, Chief Portfolio Manager and Founder, CastleMoore Inc.

FOCUS: Technical Analysis & Macro Portfolio Strategy

______________________________________________________________

MARKET OUTLOOK:

The major themes over the next few months impacting the markets will be China economic data and policy response, U.S. corporate earnings & guidance and the July Fed meeting.

While the UK vote had a big short-term impact, in the end it appears that they will arrive at some relationship with the EU like Norway and Switzerland. However, in the background, the PBOC continues its stealth devaluation of the Yuan to buoy its overcapacity. Last August a Yaun devaluation rocked markets into the fall. Today, we are 4 per cent lower than that level and is the single biggest potential catalyst.

The current market structure requires investor portfolios have a high level of “convexity.” Portfolio convexity means that assets are allocated and the balance adjusted across defensive and pro-growth securities whatever class the securities are in. This insulates assets from both the long and short term consequences of “catalysts,” particularly governmental. It’s diversification by risk not asset class.

In addition, the investment climate requires investors examine what the best mix between absolute (actual annual return) and relative (the difference between absolute and a benchmark such as the TSX) performance is for their asset goals.

At present portfolio convexity for CastleMoore portfolios is not balanced and core portfolios are tilted strongly toward absolute returns.

Top Picks:

Baxter International (BAX.N)

Baxter which operates in two healthcare segments, Hospital Products and Renal, is part of a secular bull market in the sector that began in 2012. The company after a solid Q1 raised sales and earnings guidance as well as increased expectations for operational improvements and fx management. Target US$65.00

iShares U.S. Telecommunications ETF (IYZ.N)

The U.S. telecom space has one of the strongest growth profiles of any sectors in Q1 at +16 per cent and ranks very high on both weekly and monthly relative strength tables. The sector has strong seasonality in July, then pauses in August and resumes in September. Target $49.00 USD

Fairfax Financial (FFH.TO)

An investment in Fairfax is a clear investment in Prem Watsa’s ability to navigate markets, especially ones such as today, or as in 2008. Like Watsa, we believe that deflation is still a factor down in the deep. While the insurance business ticks slightly below average, his experience in derivatives allows CastleMoore to leverage our own asset allocation in separately managed accounts. Initial target of $782.00.