Cameron Hurst's Top Picks: XLRE, IPAY and EWL
The crux of Equium Capital’s investment philosophy centres around finding the most suitable equilibrium between risk and return given the prospective global market environment. Simply put, our chief goal is to understand what’s happening in markets and position portfolios appropriately to first protect capital and then earn a reasonable long-term return for our clients.
During much of the investing lifecycle, assessing risks and constructing well-balanced portfolios is fairly straightforward. However, this simply isn’t the case during turning points in the cycle. Faced with a long list of contradicting indicators, investors must now determine whether it’s time to turn the ship in preparation for a storm or ignore the gathering clouds and continue sailing in the open water.
President Trump extended the natural length of this bull market with his tax cuts, propelling corporate profits to record highs in 2018. But the sugar high was short lived and managements are struggling to produce any earnings growth at all against a backdrop of tariffs, geopolitical tensions and tighter monetary policy. Street consensus for year-over-year Q2 and 2019 earnings growth are both virtually flat. Adding corporate buybacks, which would better support long-term economic expansion if reallocated to capital expenditures, only yields earnings per share growth for the S&P 500 of about 2 to 3 per cent for all of 2019.
Somewhat counter-intuitively, this can be positive for certain sectors of the market, such as real estate. Low-but-positive growth isn’t the end of the world because it enables focused investment yielding reasonable risk-adjusted returns. To this end, Equium Capital’s portfolios remain “barbelled” across secular growth (software and fintech) and defensives with growth (real estate and staples). Equities in aggregate are only modestly over neutral at 64 per cent, but more than enough to participate in a rising market. Balancing this, portfolios hold 32 per cent fixed income, almost entirely in medium-to-short duration government issues.
Fear is easily inspired these days. One need only enumerate the myriad indicators suggesting caution, most notably global PMIs in contractionary territory. And while we note the New York Fed’s recession indicator, itself an aggregation of signals suggesting the gathering storm clouds are no joke, our process continues to position for another six to 12 months of positive returns.
In that context, it is worth highlighting our process finally added gold exposure a month ago as central banks revealed their more dovish inclinations, driving inverted yield curves and negative rates around the globe. So clearly balance is warranted and we continue to view a barbell approach as the most prudent.