John Hood's Top Picks: March 22, 2018

John Hood, president and portfolio manager at J.C. Hood Investment Counsel
Focus: Options and ETFs

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MARKET OUTLOOK

It’s an interesting week in financial markets. Facebook was body-slammed over data harvesting and alleged data collusion with Russia. Donald Trump appears to be softening his stance over NAFTA and the auto sector and now he’s looking at tariffs on China. Meanwhile, China elects Xi Jinping in perpetuity and threatens to retaliate.

My only concern is what Eric Reguly describes as the possibility the FANG stocks may well be the next to be gobsmacked by anti-trust regulators (Google has 90 per cent of search ads) and, in my view, by class-action lawyers suing for breach of privacy or litigation over AI and unmanned Uber vehicles. As Reguly argues however, the apparent savior in this is Trump. By dropping corporate tax rates and allowing U.S. firms to repatriate potentially US$2.5 trillion at an even lower rate, this will be added to capital markets and tech stocks. So I remain bullish on the U.S., but nevertheless worry sometimes that AI algorithms will continue to redefine their roles, while we sleep only to wake up in chaos.

In Canada, I have dropped my previous asset allocation by roughly half (from 15 to 20 per cent down to 10 per cent) while still retaining the banks, as they have U.S. exposure. The reason for this is that the government is rudderless. While economic growth the past two years was strong, that story has rapidly become stale. Foreign investment is down, particularly in the energy sector, because of overregulation; we can’t get pipelines built and Ottawa is only verbally supportive. Second is taxation: the U.S. is dropping rates and our previous corporate tax advantage has evaporated, not to mention a ludicrous “carbon tax” and deficit spending.

Canadian energy companies are buying U.S. assets, not Canadian. The loonie is dropping and foreign policy and trade initiatives (for example, in India) have been an embarrassment. I have therefore replaced some Canadian assets with 5 to 10 per cent developed EAFE and emerging market ETFs. Should I change my mind about Canada, I know what assets I will be selling and subsequently buying, but for now, I’m out.

TOP PICKS

VANGUARD BALANCED PORTFOLIO ETF (VBAL.TO)
Bought at $24.83.

Last time I recommended VGRO, which is 80 per cent equities. VBAL has a more usual 60/40 asset allocation. Like VGRO, it includes Canadian, U.S. and developed as well as emerging markets, all automatically rebalanced. The ETF is great for TFSAs, RESPs and other smaller accounts or for tag ends of larger accounts. It’s very competitive with ROBO at just 23bps. We hold it in a small number of client accounts.

ISHARES CORE MSCI EMERGING MARKETS IMI ETF (XEC.TO)
Bought at $29.95.

XEC is the same as IEMG from last month, only on TSX MSCI. China: 29 per cent; South Korea: 15 per cent; Taiwan: 17 per cent, including Alibaba, Tencent and others. Based on IEMG.

ISHARES U.S. SMALL CAP CANADIAN HEDGED INDEX ETF (XSU.TO)
Bought at $33.31.

U.S. small cap ETF based upon the Russell 2000. We own it on our clients' accounts.

PAST PICKS:  JULY 11, 2017

PAST PICK UPDATE: Sold ZWE 20.85 covered call Europe to purchase ZDM EAFE.

BMO EQUAL WEIGHT U.S. BANK HEDGED TO CAD INDEX ETF (ZUB.TO)

• Then: $26.67
• Now: $30.33
• Return: 13.72%
• Total return: 14.42%

HORIZON ENHANCED INCOME EQUITY ETF (HEX.TO)

• Then: $6.52
• Now: $6.56
• Return: 0.61%
• Total return: 4.60%

ISHARES CONSERVATIVE SHORT TERM FIXED INCOME FUND (XSC.TO)

• Then: $19.93
• Now: $19.66
• Return: -1.35%
• Total: 0.57%

Total return average: 6.53%

WEBSITE: http://www.jchood.com/