2018 Watermark Private Portfolios November Strategy Danny Popescu 11/06/2018 715 0 Comments Good day, Please find comments below from Harbourfront’s Ian Goodman, CFA and Portfolio Manager for the Watermark Private Portfolios. SUMMARY Having hit a high at the beginning of the month, the S&P500 sold off heavily in October, as did the S&P TSX. The main reason for the October selloff was the US Federal Reserve’s announcement on October 3rd which stated that it plans to continue increasing interest rates given the strong US economy. With central banks removing stimulus and liquidity, less investment dollars are available. Given the lower liquidity environment and the US/China trade war, investors seem less willing to pay higher prices for equities. The good news is that market fundamentals remain strong. The initial reading on Q3 US GDP was 3.5% and companies continue to report strong earnings, so the likelihood of a recession in the short-term is low. Additionally, corporate stock buy-backs, which have been large on US exchanges, will start to increase pace in the next few weeks as companies can start buying again after their earnings blackouts cease. What does this mean for our portfolios? On October 4th, with the market one day from an all time high, we cut approximately 3.5% from our equity allocation in all portfolios and put those proceeds into the Rockridge Private Debt and Real Estate Pool which is a private investment uncorrelated to public markets. Cutting equities at an all time high is not always the best course of action, as stocks typically continue to run higher. However, we didn’t like the market reaction to the Fed’s announcement on the previous day, and it has proven to be the correct decision. With the market now below important short term moving averages, we may further reduce risk in November. The good news is that the long-term uptrend that started in 2009 is still in place and as mentioned above, the economy and earnings are still strong. Additionally, we are now headed into what is typically the strongest 6-month period for equity markets. TRADES In our larger mandates we will be de-risking by adding two defensive positions and selling Infosys Technologies and TD Bank. Infosys has had a tremendous run in the past 12 months, moving up over 50%. We will be adding Walgreens Boots Alliance, the 2nd largest pharmacy chain store in the US. It pays a dividend of 2% and we should see flows into the stock should markets continue to de-risk (it held up well in October). The other company we are adding is Ventas Real Estate Investment Trust. It too saw strong flows in October and also has a strong yield at 5%. We will look to be opportunistic on these trades so they will be executed at some point during November. NOVEMBER TRADING STRATEGY Going into November we will maintain current equity and fixed income weights. Once the US mid-term elections are over on November 6th, we will have more clarity on politics in the US. At that point, we may see a market rally that can take the S&P500 up 5 to 8 % from October lows. As such, here is November’s strategy: A – If the US/China trade war gets resolved and tariffs are removed, we would become bullish and increase our equity holdings. This news would increase corporate earnings prospects and the markets should move higher to reflect this. That said, we believe there is a low probability of this happening in the very near future. B – If stocks rally above short-term moving averages with the S&P500 approaching 3,000, we will look to further reduce equities. C – Lastly and most importantly, should we see a market rally of 5 to 8% but then begin to reverse, we will: Reduce equity holdings in all mandates to the minimum levels, with the proceeds going into alternative asset classes such as private debt (these trades would remove approximately 8.5% from all mandates’ equity allocation). Implement a partial hedge on the S&P500 which will increase should the index decrease. If the market continues to rally, given the size of the hedge our downside will be minimal but if the index does drop, the hedge will reduce short-term downside. Look at adding other assets classes such as gold, agriculture and other commodities. Gold tends to be negatively correlated to equity markets which too can act as a portfolio insurance policy. Corrections are never enjoyable, but they should not be feared. They work off excesses and allow for better entry points on great companies. Ian Goodman, CFA Portfolio Manager Harbourfront Wealth Management Have a good weekend. Danny Popescu “I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone and may not reflect the views of Harbourfront Wealth Management. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by Harbourfront Wealth Management Inc.” Disclaimer – This information transmitted is intended to provide general guidance on matters of interest for the personal use of the reader who accepts full responsibility for its use and is not to be considered a definitive analysis of the law and factual situation of any particular individual or entity. 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