BofA Securities analyst Ebrahim Poonawala is not impressed with the outlook for Canadian banks. The sector, of course, enjoys too many competitive advantages to ever be a really bad investment. But if Mr. Poonawala is right, bank investors may have to be content with coupon clipping – merely collecting the dividends - while awaiting stronger profit and stock price growth.
BofA sees the prominent drivers of profit growth stalling. Mr. Poonawala expects loan growth to slow, profit margins to fall back, and provisions for credit losses - which detract from earnings - to climb. The declining loan growth involves a ‘buckling’ of mortgage lending in the face of higher borrowing costs and rising impaired loans for the same reason.
It is not difficult to expect worsening business conditions for the banks as 2023 progresses. The consensus economist view is that economic growth will slow through the first half of the year – BofA projects a mild recession – which will limit loan activity.
Mr. Poonawala anticipates that a recession will see bank stocks fall to trough price to book ratios. This implies a 15 per cent correction for bank stocks on average.
The renewing of mortgages at higher rates, which will occur steadily in the coming quarters and years – will likely result in mortgage defaults. At the very least, credit demand will falter as consumers dedicate more disposable income to mortgage payments.
The analyst has cut price targets on all the major banks, downgrading Bank of Montreal to “neutral” and CIBC to “underperform”. TD Bank is his sole buy-rated bank.
To reiterate, as business entities the domestic banks are fine. They will always be fine, and there has rarely been a time when buying bank stocks hasn’t turned out to be a lucrative purchase for patient investors.
It is also the case, however, that Canadians have embarked on a record borrowing spree thanks to a previously surging housing market. The banks, as originators of much of this debt, will be negatively affected by the deleveraging process in one way or another. The outperformance that many investors have come to expect from the sector may not be in the cards in 2023.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
CGI Inc. (GIB-A-T) Shares in the IT services firm are flirting with record highs but they are still trading at a reasonable valuation relative to historical levels. The average analyst one-year target price suggests there is 9 per cent upside potential over the next 12 months. Jennifer Dowty takes a look at the investment case.
Fresh Del Monte Produce Inc. (FDP-N) This agrifood operator is known for its bananas, pineapples and other fresh fruits and vegetables. The vertically integrated nature of Fresh Del Monte’s operations gives it a significant degree of control over its supply chain. It also has solid potential as an inflationary hedge, as Philip MacKellar of The Contra Guys tells us.
The Rundown
These TSX stocks were winners in a difficult year for the markets
Some years are remembered by investors for catastrophic market plunges. Think 1929 or 2008. Others are marked by frenzied excesses, such as the dot-com craze in 1999. The year now winding down has no such memorable characteristics. Rather, it was a grinder, one that relentlessly eroded the value of our portfolios, month after month. It didn’t matter whether you held bonds or stocks or crypto, everything was hammered. Well, almost everything. There were some sparks of light on the TSX. Some stocks bucked the downtrend and are ending 2022 with decent gains. Gordon Pape outlines some of them.
Energy stock bulls hit pause as recession looms
After two straight record-breaking years, investors that profited from booming oil stocks are now betting on a temporary retreat, as recession threatens economies in the United States and Europe.
Also see: Ark’s Cathie Wood sees U.S. now in recession, expects energy stocks to tumble
Bludgeoned bond markets hope peak inflation will bring revival in 2023
Many of the world’s big bond fund managers, from BlackRock to Vanguard, are optimistic that sovereign debt markets have turned a corner after a rout in 2022 with peak inflation and interest rates finally in sight.
Jump or slump? $30k or $5k? Play the bitcoin roulette
The world’s dominant cryptocurrency has certainly been uncharacteristically muted over the past two weeks, treading water between about $15,770 and $17,350 in the eerie wake of the FTX-induced market mini-crash in November. What happens next is anyone’s guess. But here are some educated guesses.
Also see: Gold is better portfolio diversifier than bitcoin, according to Goldman Sachs
Why putting the investment odds in your favour is so hard
When focusing on company-specific financial measures (called factors), you are taking an outside view - and it’s a strategy that increases your odds of outperforming stock market averages. But as Biff Matthews tells us, it’s a challenging approach for investors to stick with.
Others (for subscribers)
Number Cruncher: Nine TSX stocks with strongly positive analyst sentiment
Laurentian analysts reveal their six top stock picks for 2023
Wednesday’s analyst upgrades and downgrades
Tuesday’s Insider Report: Director invests over $200,000 in this telecom stock yielding nearly 6%
Globe Advisor
Why withdrawing early from RRSPs to pay down debt can lead to ‘regret’
Brokers braced for big overhaul of U.S. stock trading rules
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Ask Globe Investor
Question: If I can earn 5 per cent on a one-year GIC with no risk, why would I want to invest in a stock yielding 3 or 4 per cent that might not even make money?
Answer: Well, if you can’t stomach any risk at all, then a GIC might be a good choice. But you’ve heard the expression, “no pain, no gain,” right? If you can endure the “pain” the stock market occasionally dishes out, you’ll likely be rewarded with some very nice gains over the long run.
Over the past 20 years – a period that included the financial crisis, a global pandemic and assorted other setbacks – Canada’s S&P/TSX Composite Index posted an annualized total return, from dividends and share price appreciation, of about 8.6 per cent. I don’t remember the last time GICs paid anything close to that, but I’m pretty sure it wasn’t during this century.
What’s more, thanks to the dividend tax credit, dividends from Canadian companies are generally taxed at lower rates than interest from GICs or bonds. For example, if you live in Ontario and have annual income of $100,000 for 2023, you would pay a marginal tax rate of just 12.24 per cent on eligible dividends, compared with 33.89 per cent on interest income. (Visit TaxTips.ca to see what marginal rates apply to your particular province and income level. Also note that, if you’re investing in a registered account, taxation is irrelevant.)
Now, I’m not suggesting you should avoid GICs altogether. If you will be needing the money in the next few years to buy a house or pay for a child’s education, for example, then parking your cash in a GIC makes a lot of sense. Allocating a portion of your portfolio to GICs can also help you sleep better at night. But if you are investing for the long run, you will likely pay dearly – in the form of higher taxes and lost capital growth – for the “safety” that GICs provide.
--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)
What’s up in the days ahead
Funds such as the CI Tech Giants Covered Call ETF are sporting incredible yields right now of well over 10% - but Gordon Pape will tell us why, in a sense, they are yield illusions.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff