Mike Philbrick's Top Picks: Nov. 23, 2018

Mike Philbrick, president of ReSolve Asset Management
Focus: ETFs

MARKET OUTLOOK

October marked the second major trend reversal this year for risk assets, exacerbated by a profound surge in volatility. Virtually all global stock indexes plummeted in concert alongside oil-related names. The effect was a cascade down that offered little time for adjustment for all but the shortest trend signals.

A continuation of currency trends offered some ballast, with a persistent surge in the U.S. dollar across most major crosses. Results for longs and shorts in softs, grains and metals were mixed.

Perhaps the most interesting dynamic that played out in October was that rate instruments failed to play any role in risk management. Despite cascading losses in equity markets, government bond futures whistled past the graveyard, with nearly flat returns on the month.

Of course, we don’t expect bonds to come to the rescue every time that stocks dump. But their muted behaviour reflects the potential for a major shift in correlation dynamics between stocks and bonds. From a macroeconomic perspective this should play out when markets become concerned about the potential for an inflation shock.

In the context of these dynamics, it’s likely that the current tumult is related to market microstructure rather than to any true shift in economic expectations along the axes of growth or inflation. Had there been a genuine shift in inflation expectations, we would have expected outperformance in inflation-linked assets. Instead, inflation-sensitive commodities dropped precipitously and Treasure inflation protected securities (TIPs) barely registered a pulse.

This has caused a meaningful increase in exposure to safe assets like bonds and safe-haven currencies like the U.S. dollar accompanied by a steep reduction in risk assets like stocks in our portfolios.

This is risk managements at its best. Rather than holding static allocations of asset classes and allowing risk to run you over, we suggest that it’s better to target your risk level and let asset classes fluctuate.

It’s interesting that bonds haven’t acted as a solid source of returns in the current drawdown in equities.  This could be because of the massive amount of issuance that must be completed over the next year; this draws money away from risk assets likes stocks and drives yields higher, further attracting capital away from risk assets. This is a more negative self-reinforcing cycle.

TOP PICKS

HORIZONS 7-10 YEAR TREASURY BOND ETF (HTB.TO)

HTB seeks to replicate, to the extent its possible, the performance of the Solactive US 7-10 Year Treasury Bond Index (Total Return) net of expenses. This index is designed to measure the performance of the U.S. 7 -to 10-year Treasury bond market.

INVESCO S&P/TSX COMPOSITE LOW VOLATILITY INDEX ETF (TLV.TO)

TLV seeks to replicate to what’s reasonably possible the performance of the S&P/TSX Composite Low Volatility Index, or any successor thereto, before fees and expenses.

CAMBRIA CORE EQUITY (CCOR.N)

CCOR utilizes a combination of several strategies in an attempt to produce capital appreciation while reducing risk exposure across market conditions.

PAST PICKS: AUG. 31, 2018

ISHARES CURRENCY HEDGED MSCI JAPAN ETF (HEWJ.N)

• Then: $32.36
• Now: $30.75
• Return: -5%
• Total return: -5%

SPDR S&P AEROSPACE AND DEFENCE ETF EQUAL WEIGHT (XAR.N)

• Then: $96.07
• Now: $86.29
• Return: -10%
• Total return: -10%

INVESCO S&P 500 EQUAL WEIGHT INDEX ETF (EQL.TO) 

• Then: $21.47
• Now: $19.95
• Return: -7%
• Total return: -7%

Total return average: -7%

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