Over the past six weeks we have experienced unprecedented volatility in the markets due to the ongoing global pandemic and the price war surrounding oil. We’ve taken the opportunity to provide a timely update as to how we are positioning our equity portfolios given the current market environment.
- Within Canadian Financials, we continue to see the best opportunities in Diversified Financials and Property & Casualty Insurers.
- Regarding Canadian Banks, we continue to remain underweight. While banks entered this crisis in a much better position with higher capital ratios than the Great Financial Crisis (2008), we anticipate that their balance sheets will be used as shock absorbers during this crisis. Furthermore, the earnings power of banks will remain challenged due to lower net interest margins, weakened core loan growth, and higher credit risk.
- For the Canadian Energy sector, we continue to see most Exploration & Production (E&P) companies challenged at current oil prices and remain underweight the sector. Our preference within the energy producers remains weighted towards gas producers.
- With the fall in oil price we are seeing massive capex reduction by E&P producers. One of the indirect consequences of reduced oil drilling is there will be a fall in associated gas from those wells. Given the capex reductions we have seen to date, we expect approximately a 9Bcf (Billion cubic feet) impact to natural gas supply in North America to be shut in. While demand will temporarily be impacted by industry shut-ins from Covid-19, we expect over the year the natural gas market to tighten and prices to strengthen.
- Lastly, we recognize that aspects of business and consumer behavior will change as a result of this crisis and therefore hold exposure to positive change stories coming out of this crisis that include the following themes:
- Increase in tech enabled services for remote communication;
- Accelerating shift of e-commerce acceptance by consumer and digital payments;
- Increase focus on technology solutions in supply chain management.
- We have used the bounce in equity markets off the lows to eliminate mistakes or names that are no longer valid under the new market paradigm.
- We have established new positions in leading consumer franchises where digital and/or delivery sales are a large part of the mix. Given the current environment, a digital presence is key in maintaining brand relevance, and the behavioural changes caused by these times are likely to spur more internet commerce going forward.
- Healthcare is another area where we are increasing weights. We added to a particular pharmaceutical position on the pullback given we believe it offers high earnings achievability prospects in light of large synergy potential from a recent acquisition. An attractive yield above Treasuries is also a positive for the story.
- Additionally, the market pullback allowed us to enter a secular growth name that we’ve long had on our radar -- a medical device company who is a leader in continuous glucose monitors. While many other medical device names are being affected by deferral on discretionary procedures in hospitals (as beds are allocated to Covid-19 patients), glucose monitoring is a necessity for diabetics and it does not require a hospital admission. As such, we believe their business should be relatively unaffected by the current environment.
- We recently initiated a position in a British life insurance and financial services company. The company provided an assuring update on its U.S. solvency position and is entertaining the prospect of making this business “independent”. This action will further support the Asian business, which accounts for 85% of value, and is trading at 25% discount to its closest peer.
- We increased our weight in a U.S./China pork supplier. The company has exceeded market expectations, delivering 32% recurring profit growth in 2019. For 2020, management expects solid growth as it has been able to offset some of its lost restaurant business with gains in retail in the U.S. and will see the benefits of six price hikes in its China business. The company has also gained approval for tariff exemption, which means a refund on the 35% additional tariffs that it paid for certain pork imports.
- We continue to high grade our portfolio to companies with stronger balance sheets and more predictable free cash flow. There are a number of “essential” businesses that fit this description.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on March 31, 2020. It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value.
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