Morgan Stanley chief U.S. equity strategist Michael Wilson took a well-deserved victory lap in the firm’s weekly Sunday Start report, reminding clients of his team’s recent forecasting success while also warning of market weakness to come.
Morgan Stanley was correct in identifying a strong and sustainable bull market beginning in March 2020, and correct again in recommending economically sensitive market sectors in early 2021. Mr. Wilson was also among the first to recognize a shift in market emphasis in the spring as higher-quality, more defensive large-cap stocks began to outperform as year-over-year economic growth rates peaked.
The strategist’s outlook now is much more bearish for three reasons. One, China’s growth is set to slow because of ongoing power shortages and the government continues to reign in real estate lending. Two, the Federal Reserve is set to reduce open market asset purchases, and three, global growth outside of China continues to slow.
Mr. Wilson is now advocating a barbell portfolio strategy of defensive stocks in sectors like health care and consumer staples on one end of the cyclical spectrum, and financials on the other. The term “barbell” indicates owning opposites – like the weights on either end of a barbell. In this case, an overweight position in sectors that are the most immune from a deceleration in economic growth, and also an overweight in financials that are economically sensitive in that they benefit from rising longer term rates.
In the likely event that the same factors that concern Morgan Stanley also affect Canadian equities, telecom services and grocery companies fit the bill for the defensive side of the barbell, and bank stocks for financials.
For investors looking for more on Mr. Wilson’s work, his Thoughts on the Market weekly podcast is publicly available on Morgan Stanley’s website.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Canadian Apartment Properties REIT (CAR-UN-T) The unit price of this REIT has declined 5 per cent over the past three weeks. This is a rare appearance for CAPREIT as the unit price has been in an uptrend for years, excluding the 2020 sell-off arising from COVID-19. Just two months ago, the unit price closed at a record high. As such, the falling unit price may soon represent a buying opportunity for long-term investors with the unit price nearing oversold territory, says our Jennifer Dowty.
The Rundown
Rising prices, fragile economy resurrects stagflation as market threat
Could stagflation be staging a comeback? The spectre of the 1970s is haunting the stock market as the latest round of rising prices proves stickier than most policy makers expected. For investors, the raging debate over inflation illustrates an important point: We still don’t have a clear understanding of what drives prices persistently higher. Ian McGugan tells us why investors would do well to adjust their expectations.
The stock market’s hot summer became a swoon. Where does it go next?
Just four weeks ago, the stock market looked unstoppable. Seven straight months of gains had left the S&P 500 index up 21 per cent for the year, corporations enjoyed record profits and economists predicted the fastest growth in decades. All that changed in September. The S&P 500 suffered its worst monthly drop since the start of the pandemic, as investors jettisoned tech stocks, small companies and industrial shares in the face of a befuddling mix of signals about the next chapter of the pandemic recovery. Despite the improving public health situation, some investors now expect the final three months of 2021 to be the bumpiest since the pandemic crashed the market in early 2020. Matt Phillips of The New York Times tells us more.
Hedge funds most bullish on U.S. 10-year Treasuries since 2017
If hedge fund plays on the dollar and U.S. Treasuries are a weather vane for investors’ risk appetite and the economic outlook more broadly, then hold on to your hats. Chicago futures markets data show they have built up their largest long position in 10-year U.S. government notes in four years and increased their multibillion-dollar bet on a stronger greenback to its biggest in 18 months. These trades - banking on low long-term borrowing costs, a flatter yield curve and a firmer dollar - indicate concern over future growth prospects, a strong desire for safety or lack of concern over inflation. Or all three. Jamie McGeever of Reuters reports.
Also see: Bruised market eyes Treasury yields to gauge stocks’ path
Is China still investable? Yes, but there needs to be a new approach
A “Common Prosperity” agenda that seeks to reduce income inequality might turn out to be a very good thing for the citizens of the People’s Republic of China, but Western investors in Chinese equities might be forgiven for seeing it as a very bad thing for them. For investors, China’s Common Prosperity push may raise the spectre of radical wealth redistribution or a wholesale retreat from the hybrid capitalism that has defined the country’s remarkable economic growth since the early eighties. Some observers, fearing the worst, have even floated the idea that China stocks are “uninvestable.” But Regina Chi, portfolio manager with AGF Investments, tells us why such worries might be premature.
China energy crunch may boost overseas metal producers
The energy crunch in China has some obvious winners, with coal and liquefied natural gas (LNG) prices surging to record highs, but the outlook for other commodities is more mixed and dependent on how the crisis plays out. Current indications are that producers of primary metals will be asked to cut back more than secondary users such as manufacturers. If this is the case it should mean China will see lower production of metals such as steel, aluminum and refined copper. Clyde Russell tells us more about what could lie ahead.
Others (for subscribers)
John Heinzl’s model dividend growth portfolio as of Sept. 30, 2021
Gordon Pape: My High-Yield Portfolio continues to blow past expectations, but it’s time to make changes
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Chairman invests over $400,000 in this stock yielding over 4%
What to watch for in the U.S. SEC’s GameStop report
Globe Advisor
The optimists still at the bull market party
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Ask Globe Investor
Question: People are often advised to invest in stocks that are eligible for the Canadian dividend tax credit, because such dividends are taxed more favourably than dividends from U.S. stocks. However, as I understand it, the Old Age Security “clawback” is based on a taxable income figure that is calculated using the grossed-up amount of the dividend, which would inflate one’s income and could lead to reduced OAS benefits. Would U.S. stocks be a better choice for seniors who have reached the OAS clawback threshold?
Answer: The short answer is no. While it’s true that Canadian dividends can increase the OAS clawback (formally known as the OAS recovery tax), that’s not a reason to avoid them. As John Heinzl demonstrates, thanks to the Canadian dividend tax credit, any reduction of OAS benefits is far outweighed by the favourable tax treatment of Canadian dividends compared with other types of investment income such as U.S. dividends or interest.
What’s up in the days ahead
Brenda Bouw catches up with Mawer Investment Management portfolio manager Jeff Mo for some under-the-radar U.S. stock picks.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff