Insights on the Global Financials

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HBG: Post-Brexit Portfolio Changes

The Hamilton Capital Global Bank ETF (HBG) held almost 12% cash leading up to the Brexit vote on June 23rd, which provided an opportunity to strategically add positions after the “Leave” side declared victory and equity markets and bank stocks declined sharply. From Thursday June 23rd to Monday June 27th, the global banks experienced a sharp correction, falling 11%. The European banks took the brunt of the correction, declining 21%. Canadian banks declined ~4.5%, while the U.S. banks declined by over 10% (KRX down 11%, BKX down 12%). The Australian and Indian banks declined 3.9% and 2.1%, respectively over the same period.

In light of this deep correction, we made the following changes.

First, we went to zero exposure for the Canadian banks in favour of U.S. banks, increasing the overall weighting by nearly 800 bps, to ~44% from ~36% (note, this change took place before CIBC acquired U.S. mid-cap bank PVTB, the former showing as a top 10 holding as of May 31st). The fund added five new U.S. bank positions (two mid-caps, three large-caps). Although we generally retain limited exposure to the U.S. large-caps/universal banks owing to their significant earnings headwinds and regulatory risk, these banks screened as significantly oversold relative to their mid-cap peers, so we took advantage of the Brexit correction to add a small exposure, including to Wells Fargo (now a top 10 holding). Over time, we would expect to reallocate back to Canadian banks or other U.S. mid-cap banks.

Second, despite the severe correction, we made no material changes to the overall weighting of our European bank holdings; however, we did make some changes within the portfolio, including allocating a modest amount of cash to preserve the pre-correction weightings for our favoured holdings. We also kept the weighting of our Northern European exposure unchanged; those holdings, on average, outperformed the European bank index by ~9% during the correction, cushioned by their 5%+ yields.

Third, of note, we did not add to our positions in U.K. banks, instead opting to remain underweight with exposure of less than 3%.

The net effect of the above was to reduce HBG’s cash position from 12% to 7%; we expect to opportunistically allocate additional cash in the coming weeks.

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.

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