John Zechner, chairman and founder at J. Zechner Associates
Focus: North American large caps

MARKET OUTLOOK

The first wave of the downturn, which started in March, saw mass liquidation of securities as investors were completely unsure about the severity of both the virus and the ensuing economic fallout. Stocks, credit, commodities and even safe havens like gold were caught up in that initial panic sell. In mid-March, we put some of the cash available in client accounts to work, increasing equity weight from about 30 per cent to 50 by buying into high-quality, higher-yield stocks. We also reduced the bond portfolio from 45 to 35 per cent, as we see little upside given the low yields. The last few weeks have seen a huge technical rebound driven by short-covering, some re-balancing into stocks from major pension funds and easing liquidity fear. The latter was driven by the strong central bank response and particularly the U.S. Fed, which provided unprecedented liquidity into the market and halted a “solvency crisis.”

We still see the recent recovery as a “bear market” rally and took our stock weight in client accounts back down to 40 per cent as of April 9. The recent rally in energy stocks has given us the chance to exit the small remaining holding in producers, with some of those stocks at levels 40 per cent or more above those at the end of March. We don’t foresee the OPEC+ agreement offsetting the massive decline in energy demand globally. Basically, no Canadian producer is making money at current prices and we see more production shut-ins, losses and defaults before this sector truly bottoms out. We continue to like the pipeline companies such as TransCanada, Enbridge and Keyera for their higher reliance on volumes rather than prices and their dividend yields.

Given the sharp recovery in U.S. stocks, we are reducing some core positions in technology and telecoms that we had recently added to. In the hedge fund, we took the equity position back down to about 40 per cent from over 70 per cent three weeks ago and added back some short positions in U.S. indexes last Thursday. Earnings and economic data are going to be horrible and analysts’ estimates are still too optimistic in our view, as investors may just give stocks a “pass” on numbers over the next two quarters. On any further weakness, we would rather add to core positions in the stronger companies than chase further gains. This is a time when stock picking and active management can add value, and we will watch the price action and look to add good companies who we think will survive this recession and show growth on the other side.

We continue to have a strong position in gold stocks. Though they got caught up in the initial liquidity-driven downturn, the massive monetary stimulus and build-up of debt will be a tailwind for gold prices. The debt accumulated to survive this crisis will have to be addressed at some future date and we see that the devaluation of paper currencies of the most indebted countries (which now includes the U.S) as the most likely scenario. This would all be positive for gold, and we stick to our earlier projection that gold prices will crack through US$2,000 in this cycle.

TOP PICKS

ENBRIDGE (ENB TSX)
Last purchased at $38 in March.

BCE INC (BCE TSX)
Last purchased at $53 in March.

MARTINREA INTERNATIONAL (MRE TSX)
Last purchased at $6.50 in March.

PAST PICKS: JULY 15, 2019

VANECK VECTORS GOLD ETF (GDX NYSE)

• Then: $26.18
• Now: $28.49
• Return: 9%
• Total return: 10%

DISNEY (DIS NYSE)

• Then: $145.06
• Now: $99.92
• Return: -31%
• Total return: -31%

BAYTEX ENERGY (BTE TSX)

• Then: $1.88
• Now: $0.41
• Return: -78%
• Total return: -78%

Total return average: -33%

TWITTER: @jzechner56
WEBSITE: www.jzechner.com