Portfolio Positioning: Adding More Fixed-Income
Cameron Scrivens
Portfolio Manager and President
Kai Lam
Chief Investment Officer
REGIONS IN FOCUS
CANADA
Government bond yields have perhaps reached a peak, as the Bank of Canada holds on additional rate hikes.
Canadian financials have outperformed U.S. and international peers amid rising stability risk and sector correction.
Inflation data shows continuing deceleration in consumer prices, net positive for macro and market dynamics.
U.S.
Bullish on near-term growth rally. Technology and growth names have climbed as odds of further interest rate increases have come down.
Stability risks have persisted among regional banks, with more support from the Fed a possibility.
Recession risks are rising as financial conditions tighten, though the economic data has remained resilient.
INTERNATIONAL
The risk profile has increased overall for European banks, with some Credit Suisse bondholders facing material write-downs.
Investors continue to rally to European military and defense stocks, such at Rheinmetall AG.
Growth expectations from China’s reopening have tempered, but there are opportunities to gain indirect exposure to discretionary consumption stocks.
Our take from early March on why a recession may just be avoided—Read: Clear the Runway: Signs of a Soft Landing
MARKET WATCH
What we’re adding – Canadian fixed-income
We are still overweight on cash, but that position keeps shrinking while we increase our exposure to fixed income. We benefited from trades made just before the collapse of Silicon Valley Bank sent yields tumbling, purchasing Canadian bond exposure at very attractive levels by buying an aggregate-bond ETF that holds mostly government bonds with an average duration of around 7.5 years. The ETF approach allows us to be more tactical and responsive to market dynamics, relative to our individual bond holdings.
What we’re underweight – Financials
We hold U.S. and Canadian large-cap banks, as well as one European lender (ING) but are underweight in the sector overall. The names we do hold are best-of-breed institutions that are facing none of the stability issues that U.S. regional lenders or some European banks are experiencing. More broadly, the yield curve is very inverted, which indicates a recession is coming. While higher rates improve a bank’s net-interest margins, we expect loan losses to increase amid an eventual downturn.
Read: Rising Defence Budgets Present Opportunity to Go on Offence
A look at some of the companies we’ve been buyers, holders or sellers of in the past month:
| Company or issue | Buy, Sell, Hold | Thesis |
|---|---|---|
| Teck Resources Ltd. (Ticker TECK.B-TSX) | Buy | We took advantage of recent market volatility to buy shares of Teck Resources at an attractive valuation. Teck is one of Canada’s leading mining companies with a focus on steelmaking coal and copper. The steelmaking coal operations generates strong cash flow and helps fund the production growth within the copper segment. We like copper as both a China recovery play in the short-term but also demand from electric vehicles and power infrastructure in the long-term. Teck offers production growth, improving free-cash-flow, dividend growth, an eventual elimination of its dual-class share structure and potential re-rating from the spin out of the coal business. |
| Rheinmetall AG (Ticker: RHM-DE) | Hold | Europe is entering a major defence spending upcycle and the company’s sales should double from 2021 to 2026, with profit growing significantly more than this. The company offers visible double-digit revenue growth, expanding margins, improving returns, and has a strong balance sheet. Rheinmetall in particular is a prime beneficiary of the increased demand for ammunition in the Ukraine and general stockpiles within NATO member countries. |
| Alphabet Inc. (Ticker: GOOG-NASDAQ) | HOLD | Alphabet is the holding company of Google, which manages the world's largest search engine (Google), the world's most used smartphone operating system (Android), and many other internet-based services, including the world's largest video-sharing site (YouTube). It relies primarily on advertising and generates more than 45% of the company's revenue from the US. The EMEA region (Europe, Middle East, and Africa) generates over 30% of sales, and the Asia/Pacific region 15%. Alphabet offers low-to-mid teens EPS growth for the next several years, generates significant free-cash-flow, high return-on-equity, a rock-solid balance sheet, dominates online search and is managed by a very strong management team. Despite these characteristics, valuation is sitting at the low end of its 10-year historical range. |
NEWSLETTER
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Although we obtain information contained in our newsletter from sources we believe to be reliable, we cannot guarantee its accuracy. The opinions expressed in the newsletter are those of JCIC Asset Management, its editors and contributors, and may change without notice. Any views or opinions expressed in the newsletter may not reflect those of the firm as a whole. The information in our newsletter may become outdated and we have no obligation to update it. The information in our newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. We strongly advise you to discuss your investment options with your Relationship Manager prior to making any investments, including whether any investment is suitable for your specific needs.
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