Navigating Sectors

Apr 06, 2020 | Kyle Sarai


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I hope this email finds you, your loved ones and your colleagues safe and healthy while coping with the tremendous upheaval in our nation and throughout the rest of the world.

What a difference two months can make. On February 19th, global equity markets around the world were at all-time highs and investors were enjoying the benefits. Throughout the past year, I had written that we, as a firm, believed the markets were fully valued, and we were in the process of decreasing risk for our clients. Now that the triggering event for this recession has come to pass, we must figure out the best way to move forward. Over the past three weeks, I have had many prospective clients asking how we are positioned and where we see opportunities and risks moving forward. Below, I have outlined the situation in each sector and provided some companies we believe are currently an attractive play and those which are currently a risk. First, I would like to say I hope your advisory team reduced your equity exposure in late 2019 and held cash on the sidelines, however, if they did not, it is not too late to upgrade your portfolio.
 

Financial Sector: Canadians have always considered the banks to be a safe investment, however, three of the five largest banks have underperformed the broader market on fears of low interest rates and a high consumer debt-to-income ratio. BMO, Scotiabank & CIBC have been the hardest hit, with only RBC and TD outperforming the TSX. We recommend being underweight the banking sector, and that includes US banks as well during this time. With regards to Real Estate Investment Trusts, we only own one-Brookfield Asset Management. If businesses continue to remain closed for the foreseeable future, one can surmise many will not be able to pay their leases in the months ahead, therefore, caution in the REIT space is warranted moving forward.

Consumer Sector: Most of the world is social distancing and staying home, which means restaurants will be hit very hard during this pandemic. We recommend using this pullback to add grocers such as Metro, Costco, Loblaw’s and Kroger to your portfolio. As a general rule, be careful in owning any highly leveraged consumer businesses, as corporate credit is currently tight.

Industrial Sector: We have been underweight industrials recently, however, this pullback could be a good time to begin snatching up starting positions in companies such as CP Rail, Waste Connections, Lockheed Martin and Honeywell. If the global shutdown continues, be aware that infrastructure projects will be delayed.

Energy Sector: We do not and will continue to not include energy companies in our portfolio. One could make the argument they are extremely undervalued due to the price war between Russia and Saudi Arabia, however, with stay home measures in place and global travel plummeting, global demand is down significantly. Right now, we are not recommending buying any energy stocks, however, if you were looking to add a starting a position to your portfolio, we would recommend Suncor and Canadian Natural Resources.

Healthcare Sector: We are currently overweight in this sector and will continue to add industry leaders such as UnitedHealth Group, CVS Health Corp, Johnson & Johnson & Merck. Once we are passed the peak of the pandemic, we believe these companies will continue to be solid investments due to the demand for healthcare services by aging populations in Canada and the US.

Technology Sector: If you are a growth investor, I would highly recommend owning quality technology companies in your retirement & corporate accounts. Companies such as Google, Facebook, Microsoft, Amazon.com, Apple, Salesforce.com, WorkDay, ServiceNow & Uber Technologies are changing the way we do business. Most of these companies have held up in the market downturn, as the current work-from-home model has increased demand for these services.

Minerals & Mining Sector: Late in 2018, we made the decision to add exposure to physical gold (5%). We also added Franco Nevada to our model. This was the first time our team made the decision to add this sector to our portfolio since I have been an advisor at RBC. In the current situation, given the unpredictability and volatility of markets, I would recommend gold as a hedge to the equity markets.

Fixed Income: Bonds, in general, have been an interesting topic throughout the last month. If you owned investment grade corporate bonds and preferred shares, your portfolio did not hold up in the downturn. These asset classes have always promised to be a hedge to equities, and historically they have been, however they were not in the month of March. The PIMCO Monthly Income Fund (one of the largest bond funds in the world) dropped over 17% from its peak. We recommend using this time to trim a portion of your government bonds and use the proceeds to buy high quality corporate bonds, as they are very attractively priced due to the sudden pullback.

Conclusion

We do not know how long this bear market will last. Many clients have asked if this is a situation similar to the Great Depression of 1929 or a quick recession similar to Black Monday in 1987. There are many factors that need to play out over the next few months to determine which situation we are in.
There are many things we are doing for our clients during this time of uncertainty, including calling them once a week to answer their questions directly and sending a client newsletter each Saturday to recap the week and offer our projections for the following week.

Kind regards,

Kyle Sarai, MBA