French equities are ‘best buys’ among global stocks

‘Le jour de gloire est arrivé,’ according to Equium Capital Management president Cameron Hurst. Mr. Hurst sees more stability in Germany and riskier opportunities in Italy and Spain, but he argues that France offers the best of both worlds in terms of potential for gains and managing risk.

global_stocksLike the rest of the economy, the financial industry has evolved in recent years, due in no small part to technological advances. Stronger federal regulations, better software, and a more educated and informed public, have “enabled the individual investor or the small shop, if you will,” says Equium Capital Management CEO and chief investment officer Cameron Hurst. “Thus, it’s harder to get ahead of the market.”

The resources available to all classes of investor may have improved, somewhat levelling the playing field, though to most market observers it likely comes as little surprise that this has not necessarily improved the quality of the individual decisions those investors make.

When founding Equium Capital in Toronto last year, Mr. Hurst and partner Adam Murl opted to generally trust the collective market’s ability to progress, building a core portfolio based on exchange traded funds. Mr. Hurst points out that capital allocation, choosing which types of investments to put money into, is far more important than specific stock selection. “Allocations drive returns,” he says.

Investment strategy combines global stocks and safety

As such, Messrs. Hurst and Murl devised a “global tactical allocation strategy”, combining a focus on foreign assets (often lacking in the domestic investing landscape, Mr. Hurst says) with a drive to preserve capital. The diverse makeup of exchange traded funds may mean missing out on the largest gains but, more importantly, it moderates any pullbacks.

Mr. Hurst adds that simply buying diverse assets and holding them will not create stability or protect against losses. “I don’t believe you’re right if you’re right at the wrong time,” he asserts. “You have to be able to get out of the way, in essence.”

He says that his past experience working with institutions such as Canaccord, Royal Bank, CIBC, and Barometer Capital amply demonstrated the need to be “tactical” and responsive in the current market, moving quickly to avoid losses when a formerly profitable investment thesis turns around.

“The more you change lanes, the more comfortable you get changing lanes.

“There’s nothing inherently wrong with trading.”

Equium uses fundamental research to determine what geographic areas, industries, and sectors to invest in. When Equium Capital’s portfolio came online last January, it was underweight on energy and overweight on US technology, according to Mr. Hurst.

Equium adjusted its portfolio in June, realizing technology profits while remaining bearish on energy. “We think oil has a lot of big problems in front of it,” says Mr. Hurst. He also warns against exposure to telecommunications, consumer staples, and utilities companies, or the bond proxies, as they are often known.

Looking to healthcare and Europe for bargain stocks

Where he does see a brighter path ahead, however, is in healthcare stocks, specifically the medical devices field, and in global stocks, especially in Europe.

Although he says he sees “zippier” (though riskier) movement in Italy and Spain, and Germany remains “stable and stalwart”, Mr. Hurst argues that France offers the best of both worlds in terms of potential for gains and managing risk.

Among the reasons he cites for his bullish expectations for the country is the landslide election of Emmanuel Macron to the presidency, which Mr. Hurst describes as a strong mandate for change. European Central Bank president Mario Draghi’s recent hawkish remarks about withdrawing fiscal stimulus has further stoked anticipation for more bullish times.

Because of past economic turmoil, the French economy is also undervalued, making stocks a relative bargain. Mr. Hurst himself says: “We wouldn’t have wanted to touch France three years ago.” Despite his past Francophobia, nowadays his first ‘best buy’ is the iShares MSCI France ETF (NYSEARCA—EWQ) for general exposure to the country’s recovery.

Mr. Hurst chose his second ‘best buy’, the iShares Dow Jones US Medical Devices exchange traded fund (NYSEARCA—IHI), in part because “it’s a little more defensive”. He says health care as a whole is operating smoothly, valuations are relatively low, growth prospects are good considering aging demographics, and both procedures and devices are efficient.

While some analysts may be concerned about US political decisions harming healthcare stocks’ prognosis, Mr. Hurst asserts that medical devices have rarely come up in discussions on repealing and replacing the Affordable Care Act, commonly known as Obamacare. Canada, meanwhile, does not boast many medical device companies of its own, so any ETF based on the few that exist would be subject to greater volatility.

Mr. Hurst also notes that US medical device makers do not only serve care providers in their own country. “The devices market is very much a non-local market.”

This is an edited version of an article that was originally published for subscribers in the July 21, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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