Sep 20, 2016

Tyler Mordy's Top Picks: September 20, 2016

BNN Bloomberg

Tyler Mordy , BNN

Tyler Mordy, President and CIO at Forstrong Global Asset Management

Focus: Exchange-traded funds

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Market Outlook

It’s been three years since the world panicked over an alleged “fiscal cliff”. Yet, in a rare intersection of opinion, both “the Donald” and Hillary Clinton are united on fiscal expansion, with a focus on upgrading the U.S.’s aging infrastructure. They have plenty of ammo for the argument. Debt-to-GDP has stabilized since 2011 and the deficit has come in dramatically. Gross government investment as a percentage of GDP is at a 70-year low.

What’s more, lobby groups such as the American Society of Civil Engineers claim that U.S. GDP could fall by $4 trillion between 2016 and 2025, due to lost sales and rising costs associated with bad infrastructure. Pitching into the debate are the likes of Larry Summers and even Fed Vice Chair Stanley Fischer, with arguments that fiscal largesse is the solution to concerns over “secular stagnation” (a phrase originally coined by Alvin Hansen in 1938 following the Great Depression).

In Canada, the Liberal government was elected on a platform that placed austerity and balanced budgets on the back burner. More globally, fiscal stimulus is also making a comeback. For the first time in five years, more developed economies plan to loosen rather than tighten fiscal policy (16 countries for the former, while only nine for the latter). Expect this to be a multi-year trend.

Meanwhile, despite all the hand-wringing over the vaunted China slowdown, emerging markets have bottomed. Canadians risk missing out on the rally — collectively, they hold a whopping 59 per cent of their equity portfolio in domestic stocks (relative to just a 3.4 per cent weight in the global stock index).

Looking ahead, our theme of “upside risk” remains this year. Given the tug-of-war between heightened central bank activity (bullish for financial assets) and the more sobering realities of slow growth (bearish), it is imprudent to go “all in” on one scenario. The best strategy for clients is to retain a balanced portfolio stance with global diversification tilted towards the world’s super trends.

Top Picks

Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR.K)

Most recent purchase: May 16, 2016 at US$23.17

China needs a better financial system as it moves from the resource mobilization stage of growth (where the main job was to invest as much as possible to build up infrastructure and basic industry) to the resource efficiency stage (where the job is to maximize the return on investment). Therefore, over the next several years China will see slower but better growth thanks to reduced capital waste (less white elephant infrastructure spending, less corruption, less unproductive debt). On balance, this shift is positive for asset prices. Given China’s enormous economic footprint (China surpassed Japan as the second largest economy in the world in 2010), global investors are immensely underweight on Chinese equities. As China continues to open its financial markets to foreign investors, Chinese equities will ultimately become a predominant holding in global investment portfolios.

iShares MSCI India ETF (INDA.Z)

Most recent purchase: August 25, 2015 at US$27.22

Fundamentally, India has a lot going for it (young, rapidly growing consumer economy; net-importer of commodities; pro-business government pushing through structural reform; monetary policies devoid of ZIRP, QE, etc.). However, a new catalyst may have emerged: with the central bank smashing inflation, there is big potential for Indian policy rates to come down. This has a high likelihood of creating a “triple merit” scenario of falling interest rates, rising currencies and rising asset prices.

PowerShares Senior Loan Portfolio ETF (BKLN.K)

Most recent purchase: June 21, 2016 at US$22.97

U.S. senior leveraged loans offer an attractive alternative to high-yield bonds. Within a company's capital structure, they are typically senior to the claims of other creditors, protected by performance- and leverage-based covenants and secured by collateral, such as inventory or equipment. The loans pay a floating interest rate at a pre-determined spread over a reference rate (usually LIBOR) once a “floor” in the reference rate is eclipsed. The LIBOR floor for most loans is between 0.75 per cent to 1.25 per cent. With LIBOR spiking in recent months to 0.86 per cent, a sizable portion of BKLN’s underlying loans is now floating. With interest rates at or near historic lows, fiscal expansion on the horizon and the Fed mulling over rate hikes, BKLN mitigates duration risk while still providing an attractive yield.