Hap Sneddon, chief portfolio manager and founder at Castlemoore Inc.
FOCUS: Technical analysis and macro portfolio strategy
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MARKET OUTLOOK

The current market structure reflects a positive pro-growth view with financials, energy, materials, industrials and technology showing strong relative strength, and defensives and interest-rate sensitive sectors such as utilities, consumer staples and consumer discretionary showing weaker relative strength.

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 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, and the price for now 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.

In the near term, market indicators, including the last holdout, the advance/decline lines, have turned positive. While markets are always susceptible to unforeseen shocks, be they political or economic, any weakness will be temporary in what will be a robust and surprising run to some through Q2/18. 

TOP PICKS

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.

ALTAGAS (ALA.TO)
AltaGas recently reported earnings above consensus, raised its dividend and lowered its capital budget (several projects came in under cost and ahead of plans). The WGL acquisition is expected to close mid-2018 and financing concerns were reduced by the increase in the dividend. Technically the stock has bottomed, providing investors a very low risk entry point into the energy sector. The “utility” components to the business also offer some longer term protection in the event that the macro picture slows later in 2018. 

ISHARES NASDAQ BIOTECHNOLOGY ETF (IBB.O)
Biotech, and health care in general, are one of the few sectors in a clear secular bull market, one that began in 2012. While the sector is riding the middle ground (not accelerating higher or lower in the short term) in the rotation from defense to offense now underway, current individual company valuations and the overall technical read offers value and good risk reward from current levels.

PAST PICKS: SEPTEMBER 28, 2016

EXTENDICARE (EXE.TO)                 

• Then: $9.29
• Now: $8.94
• Return: -3.76%
• Total return: 1.41%

AECON (ARE.TO)                                

• Then: $18.00
• Now: $19.69
• Return: 9.38%
• Total return: 12.74%

BAXTER (BAX.N)                             

• Then: $47.92
• Now: $64.11
• Return: 33.78%
• Total return: 35.23%

Total Return Average: 16.46%

FUND PROFILE
Castlemoore Canadian Equity
Performance as of: September 30, 2017

3 Month: 3.08% fund, 2.98% index
3 Year: 13.29% fund, 4.50% index
Average annual return: 9.23% fund, 6.07% index
Drawdown: -4.12% fund, -8.27% index
Recovery: 5.2 months - fund, 15.7 months - index 

*Index: TSX
*dividends are reinvested

TOP HOLDINGS AND WEIGHTINGS

1. AGF Management: 7.4%
2. Avigilon: 7.1%
3. Suncor Energy: 6.8%
4. The Stars Group: 6.6%
5. Kelt Exploration: 6.5%

TWITTER: @Hap_Sneddon
WEBSITE: www.castlemoore.com