Cameron Hurst, chief investment officer at Equium Capital Management 

Focus: U.S. equities
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MARKET OUTLOOK
Looking back before everything changed on Nov. 8, there were already strong indications of economic resurgence and rising inflation:

• Jobless claims haven’t been this low since the early 1970s 
• Average hourly earnings are +2.5 per cent YoY and have been accelerating since early 2015
• Oil was $30 a year ago, that means it’s +55 per cent to +60 per cent higher versus a year ago 
• U.S. gasoline is about $2.25 now, +30 per cent higher YoY 
• Don’t even talk about food prices — friend in NYC complaining about the price of his avocados!
• So it’s not surprising five-year forward inflation breakeven bottomed in Q1/16, put in a higher low mid-year and has been climbing ever since

The economy has found its footing and we’re moving back into a more normalized environment:

• Small business optimism at peak levels of 2004/2005 and mid-1980s 
• Improved hiring intentions 
• Higher wages 
• Higher inflation 
• Higher rates

Accordingly, we have portfolios positioned for reflation and a stronger U.S. dollar.

It appears to us the initial market euphoria port-election was more about the Congress and Senate being able to work together under a pro-business president, a situation that promised to be more fiscally supportive of what was already happening in the economy:

• Infrastructure spending
• Tax reform
• Reduced regulatory burden

Markets are in a period of consolidation now:

• Digesting what the new administration will look like and what risks it brings
• Waiting for earnings to catch up with valuations
• 4Q earnings growth for the S&P 500 is on pace for eight to nine per cent YoY, emerging from a period of lack-luster earnings momentum, importantly being driven by stronger revenue growth
• Technical indicators, economic data and credit spreads all remain constructive

Asset allocation:

• Overweight equities at the expense of bonds
• Believing the 10-year Treasury sees three per cent before per cent, investors need to be careful with bonds

Country allocation:

• Overweight U.S. Germany, France and Japan
• Underweight Asia (e.g.: Japan, Australia) and the U.K.

Sector allocation:

• Overweight U.S. in financial services, industrials and technology
• Overweight Canada in financial services
• Underweight staples, telecom and utilities

TOP PICKS

ALPHABET (GOOGL.O)

• Technology continues to screen favourably though software and services are currently less compelling 
• Management getting “other bet” spending under control (paused Google Fiber expansion), which should reduce the current $4 billion drag on operating income (~11 per cent of total) 
• Core advertising business continues to be strong (+20 per cent YoY; 66 per cent of ad spending still offline), exposed to many structural growth areas (digital advertising, mobile video, cloud computing, AI and machine learning)
• Pixel phone, mobile shift headwind? Anti-trust focus, running up against law of large numbers 
• Significant international exposure (57 per cent of sales) could be hit by stronger U.S. dollar but helped by tax repatriation holiday ($83 billion cash, 15 per cent of cap)

E*TRADE FINANCIAL (ETFC.O)

• New management in September committed to growing top line or realizing value other ways 
• Higher rates are a natural revenue tailwind: 
  • Management guided 250bps NIM for 2017 and noted a 25bps rate hike in June would increase this by 10bps, so pass-through is significant 
  • Asset growth coming in faster than previously expected 
• Mortgage loan book is now fully amortizing and under $4 billion from over $20 billion in 2009 
• Tax reform beneficial because they’re a 38-per-cent payer 
• If management hits a revenue wall (pricing competition) and wants to sell, AMTD would be more interested now that the mortgage book is running off aggressively 
• All adds up to a nice one- to two-year story with a chance to buy on the pullback from pricing risk 

HONEYWELL (HON.N)

• Technical: seeing strong uptrend 
• Good-quality, diversified industrial name led by competent management team (even after CEO transition from Cote to Adamczyk at end of March — Adamczyk current COO)
• Large installed base — within HBT HON has a presence in 150+ million homes, therefore huge channel to sell into and refresh 
• HON is well positioned in the rising theme of software connectivity (connected aircrafts, autos, homes, etc.) 
• Growing sales mix in large developing economies aiding HON’s organic sales growth (China)
• Returning capital to shareholders — during 2015/2016 paid out $2.7 billion in dividends and $3.5 billion in repurchases
• Trump policies:
  • Net exporter – limit potential negatives from a border adjustment tax
  • Tailwind from possible increased defense and infrastructure spending
• Risks/challenges: unpredictable international sales (China, Russia, Brazil) and weakness in business jets
   

PAST PICKS: JANUARY 27, 2016

ALPHABET (GOOGL.O)

(See write-up above)

• Then: $717.58
• Now: $833.71
• Return: +16.18%
• TR: +16.18%

SIMON PROPERTY GROUP (SPG.N)

• Simon is a best-in-class retail REIT developer and operator with dominant high-end assets in North America, Asia and Europe
• Management has been very smart in terming out the debt structure over the last several years on lower rates
• With a fortress balance sheet, Simon can be strategic in the event of a worse-than-expected economic pullback
• All positives aside, rates going high create significant valuation headwinds for real estate
• Retail facing serious challenges at present, e.g. Macy’s, which is catching everyone in the space even though high-end operators are much better insulated
• The safest 3.6 per cent dividend yield you’ll find, which they’ve grown 13 per cent per year over the last five years
   
• Then: $186.04
• Now: $180.48
• Return: -2.98%
• TR: 0.31%

TJX COMPANIES (TJX.N)

• TJX is the largest global off-price retailer with over 3,400 stores in the U.S., Canada, the U.K. and Europe. They drive traffic to stores by selling brand-name apparel at a 20- to 60-per-cent discount to department stores. Off-price has benefited from market share donation by JCP, Sears, Kohl’s and other department stores.
• High-quality operator with a durable business model that works throughout the business cycle. The company can increase prices when consumer spending accelerates and decrease prices when it slows. TJX has had only one year of negative same-store sales growth in 1996 following the acquisition of Marshalls.
• The company’s scale allows it to buy direct from apparel manufacturers rather than the common misconception that TJX buys merchandise that is defective or has fallen off a truck.
• Stock is up nearly 10 per cent over last year, but it pales in comparison to the S&P 500 at 24 per cent
• Basically a great house in a very boring neighbourhood
   
• Then: $69.19
• Now: $75.29
• Return: +8.82%
• TR: +10.64%

TOTAL RETURN AVERAGE: +9.04%