Andrew Garthwaite, Credit Suisse’s head of global equity strategy, published a report this week called 10 Surprises for 2023, identifying where his firm’s analyst forecasts are most likely to be wrong. Some surprises, like those involving the Japanese yield curve, are largely irrelevant to Canadian investors. Others, like the potential for a hard landing in China, would be notable but not earth-shattering for domestic portfolios.
One potential surprise, however, stands out as being dangerous to investors: the possibility of U.S. Treasury yields climbing from 3.5 per cent to 5.0 per cent this year. Because domestic yields would climb along with their U.S. counterparts, the most obvious outgrowth of rising risk-free yields is that dividend and income-related investors would likely endure underperformance.
The primary driver of a 5.0 per cent Treasury yield (based on the benchmark 10-year bond) would likely be a failure on the part of central banks to tame inflation pressures. Raising rates is designed to curb wage growth and increase unemployment rates that currently remain near lows in this millennium. An environment of continued rising wages would increase the risk of a 1970s-style wage price spiral lasting multiple years.
There is also the possibility that increasingly politicized central banks raise their inflation targets. Mr. Garthwaite believes that the sheer volume of national debt of central bank balance sheets could make them more sensitive to political concerns like the negative effects of rising yields on the unemployment rate. This means central banks will be less likely to inflict pain on the employment level with higher rates in fear of political blowback.
Bonds did not offer diversification benefits in 2022 – they fell in price along with equities. Credit Suisse believes that this could result in what amounts to a partial buyers strike in bond markets, causing prices to fall and yields to rise.
The house view at Credit Suisse is that Treasury bond yields would average 3.3 per cent in 2023 and this would form a benign scenario for investors. If yields remain stubbornly high, however, and Mr. Garthwaite’s rising rate scenario begins to manifest, then investors should pay attention. It likely means another year where very few asset classes generate positive returns.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Netflix Inc. (NFLX-Q) The streaming giant’s steady stream of hit shows is helping it stand out in a crowded market while paving the way for double-digit revenue growth later this year, analysts say. At least 18 brokerages raised their price targets on the stock Friday as they cheered Netflix’s 7.66 million subscribers additions that easily beat estimates of 4.57 million.
The Rundown
TD’s head of asset allocation looks to the year ahead for stocks, bonds and investor opportunities
For long-term investors, market weakness in 2022 may be presenting attractive investment opportunities. To help investors position their portfolios for success in what may be another volatile year in the markets, Jennifer Dowty speaks with Michael Craig, head of asset allocation and derivatives at TD Asset Management. He shares his outlook for stocks, bonds, and whether the traditional 60/40 portfolio will live on.
Tech stock rebound faces doubters with earnings season ahead
A spate of earnings reports in coming weeks is set to test a recent bounce in technology and other megacap stocks, a category whose leadership position in U.S. markets has faltered after last year’s deep selloff. Lewis Krauskopf reports from New York.
Also see: What the Street is expecting for fourth-quarter results for the TSX
U.S. consumer staples stocks limp after solid performance in 2022
Shares of U.S. grocers, packaged food companies and supermarkets were lagging in the first three weeks of 2023, in a sharp contrast to last year, as their high valuations and unattractive dividend appeal pushed investors to U.S. Treasuries. Medha Singh of Reuters explains what may be behind it.
Copper on the way up, but with many ‘ifs’
Copper bulls betting on a strong recovery of physical demand after the Chinese New Year should be wary of getting carried away, market participants say. A rally fuelled by sentiment and expectations, without an actual increase in consumption, could trap investors in an eventual sharp downturn, such as the one in mid-2022 triggered by the Ukraine-Russia war and an energy crisis.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Seven dividend stocks with significant exposure to artificial intelligence
Number Cruncher: Seven Canadian equity funds with positive returns in a tough year
Friday’s Insider Report: CEO is a buyer of this energy stock with a forecast return topping 80%
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Globe Advisor
Why this money manager is taking profits from private equity to deploy in public markets
How an unhedged currency position can reduce volatility in portfolios
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Ask Globe Investor
Question: I owned shares of Brookfield Asset Management Inc. before its recent split into two publicly traded companies. Is there any guidance or formula to determine the adjusted cost base I should attribute to the shares I now own?
Answer: Yes, there is. But first, let’s briefly recap the transaction. Like many aspects of Brookfield’s sprawling business empire, it’s a bit complicated. But I’ll try to keep it simple.
Prior to the spinoff, Brookfield Asset Management Inc. traded under the symbol BAM.A on the Toronto Stock Exchange. After the Dec. 9 transaction, the company changed its name to Brookfield Corp., which now trades under the symbol BN-T. The number of shares held by each investor didn’t change: If you owned 100 shares of Brookfield Asset Management Inc. before the transaction, you held 100 shares of Brookfield Corp. after it was completed.
Concurrent with the name change, the company distributed 25 per cent of its asset management business to shareholders. This created a new company called – I warned you this might get a bit confusing – Brookfield Asset Management Ltd. For every four shares of the old BAM Inc., investors received one share of the new BAM Ltd., which trades under the symbol – you guessed it – BAM (without the .A suffix).
With me so far? Now, let’s look at how to determine the adjusted cost base of those BN and BAM shares. It’s important to know your cost base so that, when you sell, you can calculate your capital gain, or loss, for tax purposes. (If you hold your BN and BAM shares in a registered account, you’re off the hook because there are no capital gains taxes to worry about.)
According to tax information on Brookfield’s website, 88 per cent of the original cost base of the old BAM.A shares should be allocated to the BN shares, with the remaining 12 per cent allocated to the new BAM shares.
Let’s look at a simple example.
Say you owned 500 shares of BAM.A that you purchased a few years ago at an average price of $40, for a total cost of $20,000. After the distribution, you would own 500 shares of BN, plus 125 shares of the new BAM.
Using the formula provided by Brookfield, 88 per cent – or $17,600 – of the original cost would be allocated to the 500 BN shares. The ACB would therefore be $35.20 for each BN share ($17,600/500). The remaining 12 per cent – or $2,400 – of the original cost would be allocated to the 125 new BAM shares, which would have an ACB of $19.20 per share ($2,400/125). (Brookfield provides another example on its website)
In theory, your broker should do these calculations for you and update the ACB – also known as “average cost” or “book value” – shown on your statements. However, I’ve heard from readers who say their broker botched the numbers, which is not unusual in such spinoffs. So it’s worth crunching the numbers yourself to make sure they are correct.
--John Heinzl
What’s up in the days ahead
Wall Street now seems to love Chinese stocks - but are they anything more than a short-term trade? As Ian McGugan will report, the falling population trend revealed this week, in combination with political uncertainty, adds up to a lot of long-term questions.
Staring at the ceiling: World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
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Compiled by Globe Investor Staff