Jim McGovern, managing director and CEO of Arrow Capital Management

Focus: Macro strategy and international equities
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MARKET OUTLOOK
U.S. equity markets are off to a good start in 2017 after the Trump bump of late 2016.  Markets have discounted a rosy outlook based on expected U.S. policy moves including lower taxes, reduced regulations and increased infrastructure spending. With equity valuations at stretched levels, any disappointment on the policy front may trigger a sell-off. Our preference has been to long the Trump trade with our primary hedge being long U.S. Treasury bonds with 10- to 30-year maturities. The Trump trades include long financials, industrials and energy — all of which also have decent tailwinds on their own right even without policy changes. Our short book is concentrated on select consumer discretionary names experiencing secular headwinds including restaurants and mall-based retailers. We are currently at the low end of our typical leverage given the fact that U.S. policy is still not clear — especially around trade (China and NAFTA) and of course how Trump plans to pay for tax cuts and spending (i.e. the border adjustment tax on trade). These issues will have a significant impact on all areas of investment including FX, equity, debt and commodities markets. Risks are very elevated.

Globally, we are bullish on Japanese shares but with the currency (yen) hedged — ETFs like DXJ and DXJS are two examples. So far, the Bank of Japan’s yield targeting has been more successful than previous “monetary experiments” in large part due to the backup in U.S. yields. European shares are attractive on a valuation basis, especially relative to U.S. shares, but banking issues remain a concern. We expect the political calendar in 2017 (elections in the Netherlands, France and Germany — and why not throw in Italy as a forecast!) should lead to plenty of volatility, for which the Fund looks to benefit. In particular, opportunities in both French bonds and stocks should materialize as the election draws closer in May and the rhetoric heats up. Our view on EM is largely a call on the direction of the U.S. dollar. At this point, we are selectively long a number of EM countries including India, Russia, Poland and Argentina while being short of China, South Africa and Korea.

Finally, on the FX side, we are short the Canadian and Australian dollars against the U.S. dollar and also short the XIU and EWA on the basis of longer-term structural risks and valuation. Other FX trades include being short EUR/GBP and short AUD/JPY. Again, as U.S. policy becomes more defined our positions may change materially.

TOP PICKS

LITHIUM AMERICAS (LAC.TO) – LONG
This is a pure play Lithium company based in Argentina with substantial brine that is fully funded and expected to be in production in 2019. The company recently completed an equity and debt placement with two strategic partners (Chinese and Thai companies) and has a JV with world class operator SQM to develop and operate the mine. We feel the company has been fully de-risked from a development perspective and is substantially undervalued.

CHEESECAKE FACTORY (CAKE.O) – SHORT
CAKE operates restaurants across the U.S. While the company is an excellent restaurant, we believe a number of secular factors will catch up to the rather rich valuation. Given that almost all of CAKE’s locations are within a mall, they rely heavily on mall traffic which is likely in secular decline due to online shopping. While their comps have been positive, this has been on the back of price hikes which are not sustainable and far less important than driving longer-term traffic. Finally, we believe the company will face margin pressure going forward given our positive outlook for dairy prices, which is CAKE’s most important input cost.

LOCKHEED MARTIN (LMT.N) – LONG
LMT can certainly not be called a value stock given its 20x P/E. However, now that Trump has put aside the F35 program in his tweets, the all-clear has been sounded. Expect Defense Secretary Mattis to announce a $40 billion supplemental request for spare parts in March that help prepare the U.S. military’s readiness. Missile orders for LMT and RTN are the primary weapons for readiness. Defense companies are a secular play for us given the geopolitical realities post Trump, as well.
 

PAST PICKS: JUNE 28, 2016

ALBEMARLE (ALB.N)
ALB is still owned by the Fund and by family members.

• Then: $78.29
• Now: $93.90
• Return: +19.94%
• TR: +20.83

ISHARES TIPS BOND ETF (TIP.N)
TIP has been sold — there is duration to TIP so we moved into other shorter-duration inflation plays for which there are no ETFs — but we still like TIP.

• Then: $116.52
• Now: $114.17
• Return: -2.01%
• TR: -0.62%

IPATH BLOOMBERG GRAINS TOTAL RETURN SUB-INDEX ETN (JJG.N)
JJG has been sold and replaced with the broader DBA for agriculture exposure. JJG broke down technically — we should have suggested going long soybeans as a pure play but the soybean ETF is less liquid and less diversified for retail investors. Corn and wheat have remained relatively weak. We are still bullish on real assets, which include agriculture.

• Then: $33.32
• Now: $29.93
• Return: $-10.16%
• TR: -10.16%