Terry Shaunessy, president and portfolio manager at Shaunessy Investment Counsel
Focus: ETFs

MARKET OUTLOOK

While investment results in 2020 are unlikely to match those of 2019, overall economic and monetary conditions remain favourable for global capital markets. There is very little chance the U.S. Federal Reserve will reverse its dovish stance, especially with a presidential election. Confidence is improving in Europe and, with a U.S.-China phase 1 deal in place, the protectionist rhetoric on trade has subsided — at least for the time being.

As global economic growth accelerates, leadership in U.S. equity markets will shift to more value-oriented sectors such as industrials, financials and economic cyclicals. Moreover, attractively valued developed international equity markets (U.K., Europe and Japan) will benefit from renewed investor interest and portfolio re-balancing. In emerging markets, Asia ex-Japan will benefit from reduced trade and geopolitical tensions.

Interest rates should remain in a tight range around current levels, suggesting that fixed income returns will closely track the yield to maturity of global bond aggregate benchmarks. The bottom line on our strategy for 2020 is that equities will continue to outperform bonds and international equity returns will exceed those for North American equities.

UPDATE

BMO MID TERM BOND US IG BOND (ZMU TSX): We sold ZMU in May 2019 and switched into a U.S. bond aggregate (VBU). Reason: To eliminate credit risk from the bond portfolio.

INVESCO S&P EUROPE 350 EQUAL WEIGHT (EQE NEO): We sold EQE in October 2019 and switched to the Vanguard FTSE All Cap Developed Europe (VE). Reason: Invesco refused to list on TSX.

TOP PICKS

VANGUARD FTSE DEVELOPED EUROPE ALL CAP (VE TSX)

After the S&P 500, this is the next biggest equity market in the world. It’s dominated by non-U.S. behemoth corporations: Nestle, HSBC, Roche, Total and Royal Dutch Shell, to name just a few. Industry sector are much more traditional (financials, consumer, industrials and healthcare), contrasting with the U.S. focus on technology. Good dividend yield.

ISHARES CORE MSCI EMERGING MARKETS (XEC TSX)

This index is dominated by large-cap Asia ex-Japan (China, Taiwan and Korea). We think that this is where the real growth in earnings will come from in the future. This index is the most sensitive to changes in global economic growth expectations although its three-year standard deviation of 14 per cent is not appreciably higher than Canada at 13 per cent or the S&P 500 at 12 per cent.

INVESCO S&P 500 EQUAL WEIGHT INDEX (EQL TSX)

Equal weighting significantly reduces single stock risk. In the market cap S&P 500 the five largest stocks account for just under 20 per cent of the index value, with Apple and Microsoft at almost 5 per cent each. No stock is more than 1/500th in the Equal Weight index. The EQL has more breadth of industry and market cap as well as a slightly more domestic U.S. bias.

PAST PICKS: FEB. 7, 2019

BMO MID TERM US IG BOND (CAD-HEDGED) ETF (ZMU TSX)

• Then: $14.32
• Now: $15.49
• Return: 8%
• Total return: 12%

INVESCO S&P EUROPE 350 EQUAL WEIGHT ETF (EQE NEO) 

• Then: $18.41
• Now: $19.61
• Return: 8%
• Total return: 14%

ISHARES CORE BALANCED ETF PORTFOLIO  (XBAL TSX) 

• Then: $21.86
• Now: $24.19
• Return: 11%
• Total return: 13%

Total return average: 13%