JMRD Market Observer for July 7th, 2017 – JMRD Diversified Income & Growth Basket & JMRD All-Cap Basket Q2 Update

July 7, 2017

In This Week’s JMRD Market Observer

 

 

  • JMRD Diversified Income & Growth (DIG) Basket & JMRD All-Cap Basket (ACB) Q2 Update

  • Asset Allocation Strategy – Looking for inflation

  • NBFM – Interest-rate forecast: Update

  • JMRD Basket Corner

  • Retirement Corner

  • Reads of the Week

  • Economic Calendar

  • Earnings Reports

 

 

JMRD Diversified Income & Growth (DIG) Basket & JMRD All-Cap Basket (ACB) Q2 Update

 

Now that the first half of the year is in the books, it’s again time to provide the quarterly JMRD Basket updates.  This week will feature the Canadian Baskets – the JMRD Diversified Income and Growth (DIG) Basket and the JMRD All Cap Basket (ACB).  Before we get into Basket specifics, we want to again provide the handy table below showing how the various global indices and commodities performed during the month of June and Year To Date (YTD). 

 

 

Global economic momentum continues to be strong, especially in Canada, which has exceeded most developed nations in GDP growth year to date (YTD).   Below you will find some key data points that lend credence to this global economic growth story and how it may lead to a resurgence in TSX in the second half of this year, which has lagged its global counterparts in 2017 despite the stronger GDP data.

 

  • Just-released data suggest that the global factory activity continues to expand at a relatively good pace. In the U.S., the ISM index surged 2.9 points in June, the biggest monthly increase in 4 ½ years (January 2013). Encouragingly, the new orders and employment components both showed strong growth on the month.
  • Not to be outdone, the Eurozone factory gauge rose to 57.4 in June, the highest in 74 months. There was widespread improvement among countries. According to Markit (economic data service provider), “the combination of improved new order inflows and rising backlogs of work meant that the pace of job creation remained close to May’s 20-year survey record high in June”.
  • These developments coupled with marginal increases in production and new orders on China are consistent with our forecast of above-potential growth for the global economy in H2 2017 and a constructive outlook for earnings. The bottom-up consensus of equity analysts for 12-month-forward earnings of the MSCI AC (a broad index of global equities) has been revised up every week since the beginning of the year.  As long as this continues, equity markets have limited downside.
  • NBF’s CIO and Chief Market Strategist, Martin Lefebvre, recently suggested increasing Canadian equity exposure. The decision is based on the view that global economic momentum will improve in the second half of the year. This development argues for a reflation trade scenario, implying a somewhat weaker U.S. dollar and stronger commodity prices. That should buoy the S&P/TSX, which is currently trading at a significant discount to the S&P 500.

 

JMRD Diversified Income & Growth (DIG) Basket: Q2 2017 Update

 

The DIG Basket returned 0.38% in Q2 versus the TSX Total Return index of -1.64%.  Year to date, as at June 30th, the DIG Basket was up 2.57% versus 0.74% for the TSX Total Return Index.  

 

Stocks that fared well in Q1 were Veresen (VSN), up 24%, after Pembina Pipeline agreed to acquire the company at a sizeable premium of close to 18% on the date it was announced, WSP Global (WSP) after the global infrastructure services company was buoyed by global economic expansion and Dollarama, which continued to post earnings and same store sales growth above the street’s expectations.  Energy companies, Canada Natural Resources and Whitecap, lagged in the quarter due to continued uncertainty around the price of oil and whether the OPEC cuts will lower global supplies in the face of rising US production and stockpiles.  

 

During the quarter, we sold our positions in Vermillion Energy (VET) due to continued weakness in the energy sector, Hydro One (H) due to its limited growth prospects and the potentially negative impact of higher interest rates, Saputo (SAP), which recently delivered disappointing earnings and the iShares REIT Index for the interest rate reasons as Hydro One.  We also took partial profits in Dollarama (DOL), which was becoming a higher weighting in DIG due to its appreciation over the years.  We felt that lowering the position would lower the concentration risk with Dollarama. In the quarter we initiated positions in Waste Connections (WCN), a North American solid waste company, Algonquin Power (AQN), the owner and operator of power generation, distribution and transmission utility assets, Restaurant Brands (QSR), the owner/operator of Tim Hortons, Burger King and Popeye’s Chicken and lastly CN Rail (CNR).

 

Below is a snapshot of the current holdings.  The current annual cash flow is $482 for a yield of 2.92%. 

 

 

We consider the DIG Basket a top pick for clients seeking income and growth and feel it is very appropriate for a portion of a client’s equity weighting.  The current value of one DIG Basket is approximately $16,400 making the minimum initial position approximately $32,800, which is two Baskets.  This amount will continuously change as the prices of the DIG Basket components fluctuate on a daily basis.  Subsequent purchases can be made in one Basket increments.

                                                                                                           

JMRD All Cap Basket (ACB):  Q2 2017 Update

 

The All Cap Basket (ACB) is meant to be a complementary holding to the DIG Basket.  The ACB invests in both large and small-cap companies, with a focus on growth-oriented businesses that may, or may not, pay a dividend.  After posting a very good  return of 6.43% in the first quarter of 2017, the trend continued in Q2 with the All Cap Basket returning 4.80% besting the benchmark TSX Total Return, which was negative, at -1.64%.   Since we launched this basket in October 2013, it has an annual compounded rate return of 15.15% versus the TSX Total Return of 7.82%.

 

Changes made in Q2 include the sale of Spartan Energy (SPE), as per the same rationale with selling Vermillion in the DIG Basket and Sun Life (SLF) which delivered its second consecutive negative quarterly earnings report.  We also took partial profits in New Flyer Industries (NFI) and Shopify (SHOP) as they have had large moves to the upside in recent months.  We initiated positions in North American Energy Partners (NOA) a provider of mining and heavy construction services to resource companies, ZCL Composites (ZCL) the maker and supplier of fibreglass underground storage tanks, Sleep Country Canada (ZZZ), the seller of mattresses and bedding and lastly Crius Energy Trust (KWH.UN) the seller of electricity and natural gas to residential and commercial customers. 

 

Notable performers in the quarter were Shopify (SHOP) up 25% as more retailers continue to use their offering to improve their online presence, CCL Industries (CCL.B) up 13.5% as it continues to effectively deliver on its global ‘growth by acquisition’ strategy and Savaria (SIS) up 12% after it made a small tuck-in acquisition in the US to expand its reach.  As was the case in the DIG Basket, Seven Generations Energy (VII) and North American Energy Partners (NOA) were detractors, due to their exposure to weaker oil and natural gas prices.

 

Below are the current All Cap Basket holdings.

 

 

As mentioned above, The All Cap Basket is more of a growth-oriented investment to complement the DIG Basket.  The minimum purchase for the All Cap Basket is 4 Baskets or ~$66,800 at current prices, with subsequent purchases of 1.5 Baskets, or about $25,000. And again, this amount will continuously change as the prices of its constituents change on a daily basis. 

 

 

Asset Allocation Strategy – Looking for inflation

 

Highlights

 

  • The Federal Reserve got around weak inflation readings and hiked its key interest rates to 1.25% at the June FOMC meeting, in addition to opening the door to balance sheet reductions.

 

  • In Canada, Governor Poloz made it pretty clear that despite soft inflation, the outlook was bright enough to start removing some policy accommodation.

 

  • For our economics team, this means a July rate hike by the BoC is in the bag. As such, we are changing our current barbell row stance in bonds (a mix of short-term and longer-term bonds) for a shorter-than-benchmark duration in U.S. investment grade bonds.

 

  • For crude oil, while less certain than in the weeks following the OPEC deal announcement, we are still expecting energy prices to firm up by the end of the year. Speculative positioning has now shifted to the point where we believe upside risk is more likely and, despite surprisingly resilient production from U.S. shale, a deficit in the global supply-and-demand picture is still expected in 2017.

 

  • For equities, we believe the general backdrop is still sound, with most components of our macro models pointing toward an out performance over bonds. However, due to both the current weak state of the NASDAQ index and the summer lull, we’re maintaining neutral positioning.

 

  • Attractive valuations and upside risk for oil prices favour energy stocks, while the prospect of rising interest rates should also be conducive to an out performance in financials. This change should be beneficial to Canadian equities. Therefore, we’re expecting the TSX index, whose price return was slightly negative after the first 6 months of the year, to rebound in the second half.

 

See the full article

 

 

NBFM – Interest-rate forecast: Update

 

The time has come to remove the insurance policy taken out with the 2015 rate cut and return the overnight rate to 1%. In our view, Mr. Poloz’s game plan is to raise the policy rate as soon as July 12. It would take a disastrous jobs report on July 7 to prevent such a move. We see another hike following in October. South of the border, the FOMC has provided details of its plan for normalization of its balance sheet. We assume that it will start in October and that U.S. government borrowing will follow the pattern of the last four quarters. In this scenario, the combination of Fed phase-out of its portfolio reinvestment and Treasury borrowing will have less effect on the term premium over the forecast horizon than in our previous simulation. We have revised down our forecast for the 10-year yield accordingly.

 

 

JMRD Basket Corner

 

DIG Basket

 

Northland Power (NPI) – Northland Power Scraps Sale Without Finding Buyer

 

SNC-Lavalin (SNC) SNC-Lavalin completes transformative acquisition of WS Atkins

 

All-Cap Growth Basket

 

Boyd Group (BYD.un) – Boyd Group Income Fund Closes Acquisition of Assured Automotive Inc.

 

Crius Energy Trust (KWH.un) – Crius Energy Trust Announces Successful Completion of Acquisition of U.S. Gas & Electric and Conversion of Subscription Receipts

 

Innergex Renewable – Innergex acquires two wind projects in France

 

U.S. Growth Basket

 

Vantiv (VNTV) – Vantiv Wins Agreement for Worldpay, Besting JPMorgan

 

 

Retirement Corner

 

 

 

 

Reads of the Week

 

  • Hot Charts – Canada: Why did small business confidence plummet in Ontario? The Canadian Federation of Independent Businesses (CFIB) reports a 5-point tumble of small-business confidence in June, the biggest monthly decrease in six years. As it turns out, the weakness was confined almost entirely to Ontario, where confidence plummeted more than 10 points in the sharpest drop since the 2008 recession. Business sentiment in most other provinces was actually up on the month. According to the CFIB, index readings often vary for purely statistical reasons but the downdraft in Ontario appears to be policy-based: at the end of May, the provincial government announced changes to labour laws including a 31% increase of the minimum wage from the current $11.40 an hour to $15 an hour by 2019. By our calculation, that would take Ontario’s minimum wage from the current 41% of its average wage to 50% — twice the U.S. percentage and among the highest in the OECD. This is a significant change to the cost structure of small businesses over a very short period. Of course the impact could be softened by measures to reduce the erosion of competitiveness. Lower corporate tax rates could be an option (or a necessity), especially if the U.S. goes ahead with a reduction of its business taxes. See the full chart

 

 

 

 

 

 

 

 

Economic Reports

 

Monday July 10th – US Consumer Credit

Tuesday July 11th – Canada Housing Starts

Wednesday July 12th – Canada Teranet/National Bank Home Price Index, Bank of Canada Interest Rate Announcement; US Beige Book

Thursday July 13th – Canada New Home Price Index, US Initial Jobless Claims, US June PPI

Friday July 14th – US CPI, US Retail Sales, US Industrial Production, US Consumer Sentiment

 

 

Earnings Reports

 

Monday July 10th – None

Tuesday July 11th – PepsiCo

Wednesday July 12th – None

Thursday July 13th – Cogeco Cable, Delta Airlines

Friday July 14th – Citigroup, JP Morgan Chase, Wells Fargo

 

 

Enjoy the weekend!

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