Today, BofA Securities Research Investment Committee answers the most-asked questions posed by the company’s thundering herd of financial advisers, plus we discuss “the uninsurable world” and car racing’s connection to climate change.
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Stocks
Most asked questions
BofA Securities’ Research Investment Committee (RIC) answered the top 10 questions they’ve received from their financial advisers and I’m going to discuss the ones that apply most here across the border.
One of the questions, concerning the implications of current high valuations, is very relevant to investors planning for the long term. The S&P 500 is more expensive than average according to 19 of the 20 measures followed by BofA strategists. This implies a meagre return of roughly 2.0 per cent annually for the next decade based on performance data since 1987.
Another of the common questions asks for the top performing sectors in a falling rate environment. The RIC pointed to under-capitalized sectors like industrials, utilities and energy and also real estate. I’m not convinced that domestic industrials have the same performance profile but the other sectors mentioned have performed well with falling rates.
BofA advisers also requested a list of “all-weather’ stocks that perform well in both value- and performance-driven markets. The list provided is eclectic, by which I mean that very few will interest Canadian investors. But Costco Wholesale Corp., Vertex Pharmaceuticals Inc., Analog Devices Inc. and Amphenol Corp. might be worth a look.
The question that interested me the most was how the RIC could be bullish on cyclicals with the U.S. ISM manufacturing survey in contractionary territory below 50. The answer lies in the fact that infrastructure-related stocks have outperformed the tech-led S&P 500 over the last decade as protectionist policies and fiscal incentives drive growth in U.S. manufacturing.
One member of the committee, investment and ETF strategist Jared Woodard, provided a list of U.S.-traded ETFs that are benefitting from the manufacturing and infrastructure trend in a separate research report in early August. These include RBA American Industrial Renaissance ETF (AIRR-Q), GX U.S. Infrastructure Development ETF (PAVE-A), Invesco Dynamic Building and Construction ETF (PKB-A) and iShares U.S. Infrastructure ETF (IFRA-A).
The last question I’ll present is not ideal for karma-conscious investors. Asked whether the ongoing rally in aerospace and defense stocks will continue, BofA analyst Ron Epstein noted his expectations for government defense spending to rise from the current 3-5 per cent of U.S. GDP to 5-8 per cent because of rising geopolitical tensions.
Mr. Epstein has buy ratings on Northrup Grumman Corp. and RTX Corp. Both of these stocks are also in the research department’s U.S. primary top stocks list.
Now, to summarize the answers to the other questions asked by BofA advisers: fears of a U.S. recession will grow to year end but are misplaced, investors are over-confident in a soft landing, the AI hype has peaked and the non-Magnificent Seven are poised for catch-up, we are still in a technical bull market that began in October 2022 and post-election gridlock would be positive for markets.
JONATHAN HAYWARD
Earnings surprise
Everyone in insurance believes in climate change
“You’ll never find an insurer saying ‘I don’t believe in climate change’” said John Neal, chief executive at Lloyd’s of London in a Financial Times interview earlier this year. This is almost certainly true of Canadian insurers Intact Financial Corp. and Definity Financial Corp. as Report on Business wealth management reporter Clare O’Hara highlighted last week.
Intact announced fiscal third quarter catastrophe-related losses well above forecasts thanks to two bouts of torrential rains in southern Ontario, Calgary hailstorms, Jasper wildfires and Hurricane Debby-related costs in Montreal. Management now expects $1.1-billion in losses net of reinsurance for the quarter that ends Aug. 31, almost triple what had been the Street estimate of $411-million.
Scotiabank analyst Phil Hardie raised his estimate for Definity losses to $200-million for its calendar third quarter (which ends Sept. 30.) because of the same severe weather events, roughly double his previous forecast.
Mr. Hardie believes Intact and Definity can manage the losses without significant financial impairment. On the other hand, the quote from Mr. Neal is part of an FT series called “the Uninsurable World” which emphasizes growing climate change-related stress on the industry worldwide.
Diversions
F1 car racing and saving the planet
Formula One racing returned from its summer break in the Netherlands over the weekend and I’ll mark the occasion by discussing the cars as massively expensive climate-friendly technology laboratories. The engines, for one, are hybrids, using batteries that are re-charged by recovering energy from braking.
The tiny 1.6-litre ICE engine combines with the batteries to generate over 1,000 horsepower. The engines – they call them power plants – utilize 50 per cent of the energy in the fuel when regular cars use only 25 per cent. Beginning in 2026, all fuel will be from fully sustainable sources.
The drivers’ private planes and the use of air freight to carry the F1 circus across the world prevents F1 owners Liberty Media from touting themselves as champions of the environment. The F1 mechanical engineers are amongst the best on the planet, however, and the goal of mazimizing fuel economy in the race cars leads to technological advances that benefit all car owners and potentially the planet.
Intense competition leads to fuel saving innovations like pre-ignition chambers which, if adapted for road cars, would save millions upon millions of gallons of fuel. I have read that Ford Motor Co. is working on this.
I’ve been a fan of F1 since the late 1970s when my dad’s job came with backstage passes to everything. The events depicted in the 1992 movie Rush were happening at the time and I won’t ever forget seeing driver Niki Lauda, fresh out of the hospital with massive burns covering the back of his head. With all due respect to director Ron Howard though, I much prefer the 1966 movie Grand Prix with James Garner.
The essentials
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Globe Investor highlights
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What’s up next
Bank earnings and GDP domestically. BMO and BNS report earnings on Tuesday, Royal and National Bank are the next day and CIBC is Thursday. Domestic GDP for the second quarter will be released on Friday – 1.8 per cent annualized growth is currently forecasted by economists.
Nvidia Corp.’s earnings release on Wednesday is likely to throw U.S. financial media into a frenzy. Guidance and the pace of orders will be key components to test the sustainability of the AI-related investment theme. Crowdstrike Holdings Inc. reports on the same day and investors will be looking for detailed answers regarding the firm’s crashy global software update in July.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)