Equity Commentary: As at June 30, 2021
Source: David Picton | Jeff Bradacs, CFA | Michael Kimmel, CFA | Michael Kuan, CFA | Travis Irwin, CFA
Publish Date: Jul 15, 2021
Read Time:
5 minutes

While equity markets grinded higher during the quarter, beneath the headline index levels there was a rotation in the market as investors weighed concerns of peak economic growth, higher inflation, peak monetary and fiscal stimulus.
Fiscal support peaked in March with US$1.9T going direct to US consumers, ISM manufacturing also appears to have peaked in March and short-term indicators on inflation also appear to be petering out. China already seems decelerating although the rest of world will likely show acceleration as they emerge from lock down conditions. However, the likelihood of some sort of corrective action in risk assets has increased especially as investors start to worry about tightening monetary policy conditions in the US. Pullbacks should be shallow though given the long runway to economic growth against the backdrop of generally stimulative conditions.
As we transition to more of a mid-cycle framework, multiples tend to correct. The ability of companies to execute will become paramount. It is conceivable that companies have overearned in the past 12 months as costs were significantly reduced during the pandemic. Those costs could re-appear with re-opening and will be something to watch for.
Within our hedge equity portfolios, we have reduced our net exposure to cyclical names in favour of quality and growth at a reasonable price (GARP) components -two factors that tend to fare well as we transition to the mid-cycle. The one area of exception is commodities which we continued to have a favourable view with demand rebounding as economies reopen. Meanwhile supply remains constrained as commodity producers across both base metals and oil & gas remain disciplined on raising production.
Small Cap Spotlight
A small cap company we are increasingly positive on is Home Capital Group Inc (HCG). Home Capital offers residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending services, and offers deposits through its Oaken Financial brand. During the pandemic, the federal regulatory body governing financial institutions in Canada (OSFI) set capital constraints on Canadian financial institutions including HCG to ensure financial stability through the unprecedented times. Those constraints, which prohibited dividend increases and share buybacks, have been in place since March 2020 but could be relaxed in the second half of 2021. Home Capital currently has a Common Equity Tier 1 (CET1) ratio that is well above their targeted levels (currently at 21% vs. targeting 14-15%), and once these restraints are lifted by OSFI we expect the company to return meaningful amounts of capital to shareholders via dividends and buybacks. Given the strong capital position of the company and discounted valuation relative to the peer group, we are positive on shares of HCG.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on July 15, 2021. 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.
This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.
There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.
® Registered trade-marks of Picton Mahoney Asset Management.
© 2021 Picton Mahoney Asset Management. All rights reserved.