Full episode: Market Call for Tuesday, October 10, 2017
Cameron Hurst, chief investment officer at Equium Capital Management
FOCUS: U.S. Equities
Equium Capital shifted portfolios to a more cautious stance with higher cash levels through the summer months, as markets outside Canada looked to digest an increasing list of risks against a backdrop of strong risk asset appreciation, i.e. SPX +10 per cent, DAX +12 per cent, Emerging Markets +18 per cent through mid-June.
July and August provided the necessary opportunity for markets to consolidate those gains, adapt to shifting central bank policies and elevated geopolitical instability. Further, market sentiment evolved towards greater comfort with late-cycle investing strategy, eschewing the usual timely fears of imminent collapse.
Over this same period and into September, our Investment Committee migrated portfolios back to a fully-invested stance with more emphasis on Health Care and even small, tactical exposure to high-quality Energy, both typical late-cycle outperformers. Global developed and emerging markets remain over-weighted, owing to their various and timely growth drivers. We are carefully observing the interplay of USD strength with emerging market resilience; however, to date the Fed’s transparent and calm approach to policy normalization combined with positive but modest inflation readings appears most likely to keep interest rates from spiking.
Not typically known for wearing rose-coloured glasses, the team’s positive near-term view of markets risks rests heavily upon the sanguine picture in credit. 2yr U.S. treasury yields have a positive spread over Fed Funds, indicating continued policy support, while investment grade through high yield credit spreads are at or near multi-year lows. Moreover, central banks the world over continue to pump liquidity and financial conditions remain very loose, even if very slowly reversing course.
Equium Capital’s consistent process is to monitor risk assets real-time, constantly squaring the technical picture with underpinning fundamentals to reduce risks while focusing investment exposures in the best neighbourhoods of the market. At present, we see a positive outlook into year-end warranting full-investment levels and reduced bond exposure, with equities tilted outside of Canada. While we remain ever-vigilant for negative developments, particularly in currency and credit markets, the favourable balance of policy and economic momentum should sustain global growth and asset appreciation near-term or longer.
SPDR S&P BIOTECH (XBI.US)
Expense ratio: 0.35%
1 Year Absolute: +37.1%
1 Year vs Sector: +20.5%
1 Year vs S&P 500: 16.5%
Valuation (Median top 10 Holdings)
Top line growth: CY17 +268%, CY18 +101%
Bottom line growth: CY17 +7%, CY18 -28%
P/S Multiple: FY17 70.5x, FY18 26.6x
(P/E not relevant)
- POSITIVE - Momentum in the space on M&A hopes and more positive regulatory environment
- Technicals look strong
- Significant positive mementum in the space on the hop of increased M&A activityfollowing Gild/Kite announcement. large caps have significant cash balances and are looking to reinvigorate their pipelines
- Small and mid cap names will be significant beneficiaries of any increass in M&A activity hence our preference for an equal qeighted ETF.
- REduced pricing reform risk - WH rhetoric has cooled substantially and draft executibve order on drug pricing focuses on reduced regulation rather than price control.
- More permissive FDA means greater number of drugs are making it to market - greater flexibility for breakthrough therapy and priority review
- Significant opportunity for growth in EMs - large underserved markets with increasing health aqwareness
iShares MSCI Germany ETF (EWG.US)
Expense Ratio: 0.48%
1 Year Absolute: +19.9%
1 Year vs. ACWI: +5.7%
1 Year vs TSX +9.0%
Valuation (Top 10 Holdings)
Top line growth: CY17 +6%, CY18 +4%
Bottom line growth: CY17 +10%, CY18 +7%
P/E Multiple: FY17 17.5x, FY18 16.1x
- POSITIVE - Germany is benefiting from a cyclical rebound within Europe, extremely low rates (0.48% 10yr) and positive global economic growth trends, namely Emerging Markets
- Economic indicators continue to improve across the board with many hitting post-Greek crisis highs. Industrial production (+4%). IFO business climate (115. Near all time highs), PMI (57. 7th Sep). Capacity Utilization (86.7%) all near or at cycle peaks
- Liquidity conditions remain positive with low rates, tight spreads. ECB expectations for a hike not until 2019, and strong loan growth.
- Recent election has created noise around EU integration however we see the likely Jamaica coalition (CDS/CSU, FDP and Greens) as potentially more positive for the domestic story as the odds of tax reform and infrastructure spending appear higher under this regime and likely limits the risk of EU debt mutualisation and other fiscal fisks that would have been more probable with the pro EU SPD.
- Valuation remains at a discount to other major markets (SPX 3.2 times. ACWI 2.3 times vs MXDE 1.9 times P/B) while ROE is higher than average (12% vx ACWI 10%) as is growth (16% vx ACWI 13%)
- The risks are: the fairly high auto exposure (14% of index), which is undergoing a price fixing investigation and has the eye of President Trump. Also, a materially higher Euro would depress export growth and weigh on Germany disproportionally (NX 8% of GDP). Finally we expect Merkel to form her ruling coalition by the end of the year but if these plans fall apart we could see political risk pick back up.
E*TRADE FINANCIAL (ETFC.O)
Market Cap: US$9.7B
1 Year: +50.3%
1 Year vs. Financials : +14.2%
1 Year vs SPX Index +29.7%
Top line growth: CY17 +20%, CY18 +8%
Bottom line growth: CY17 +30%, CY18 +12%
P/E Multiple: FY17 19.7x, FY18 17.6x
- POSITIVE - Strong cyclical tailwinds and multiple drivers of organic growth with optionality from potential for takeout
- New management a year ago remains committed to growing top line or realizing value other ways; to date this hasn't been a problem with top line acceleration for six straight quarters
- Higher rates are a natural revenue tailwind
- Management guided to low 270's bps NUM for 2017 vs. 274 bps in the most recent quarter - so clear to see Management conservatism
- Previously noted a 25 bps rate hike in June would increase this by 10 bps, so pass through is significant
- Announced a $1B share buyback to be completed before the end of 2018 boosting top line impact
- Mortgage loan book is now down to $3B, -25% YoY, and fully amortizing
- Tax reform beneficial because they're now a 38% payer
- If management hits a revenue wall (pricing competition) and wants to sell, AMTD would be more interested now that the mortgage book is funning off aggressively
- Stock has had a great run as investors got wise to the story, so now valuation is running at highs of the historical range resulting in increased execution risk to the strategy (though we would argue it's more than offset by the multiple growth drivers and takeout opionality)
PAST PICKS: May 17, 2017
ABBOTT LABORATORIES (ABT.N)
- Then: $43.08
- Now: $55.04
- Return: 27.46%
- Total return: 28.46%
Total return: 4.85%
- Then: $91.76
- Now: $107.32
- Return: 16.95%
- Total return: 17.14%
TOTAL AVERAGE RETURN: 16.81%
EQUIUM GLOBAL TACTICAL ALLOCATION FUND
|3 Month||New fund*|
|1 Year||New fund*|
|Inception (annualized)||New fund*|
*Regulations prohibit publishing returns until after 1 full year of track record has been established
Benchmark is comprised of 60% equity (15% S&P/TSX Composite Index. 45% MSCI World index) and 40% bonds (20% Bloomberg Barclays Canadian Aggregate Bond Index and 20% Bloomberg Carclays U.S. Aggregate Bond Index). Returns are based on reinvested dividends.
TOP HOLDINGS AND WEIGHTING
- iShares Core U.S. Aggregate Bond Index ETF - 16.0%
- Vanguard Canadian Aggregate Bond Index ETF -13.7%
- iShares Core S&P/TSX Capped Composite Index ETF -12.8%
- iShares MSCI ACWI ETF - 12.2%
- iShares MSCI France ETF 6.0%