Zongyuan Zoe Liu, the Maurice R. Greenberg Fellow for China Studies at the Council on Foreign Relations, outlined the four “D’s” of China’s economic deterioration during the most recent edition of Bloomberg’s Odd Lots podcast. China’s growth, as a primary determinant of global commodity prices, is of huge importance to a wide swath of the Canadian resource-based economy.
Recent data from China has been abysmal despite the post-pandemic reopening of the economy. Bank loan activity fell to a 14-year low and retail sales growth, which had been running between 9-10 per cent before 2020, was announced at an anemic 2.5 per cent.
Ms. Liu sees four structural factors holding back growth: demand, debt, demographics and decoupling.
In the case of demand, the authoritarian Chinese government has been reluctant to support consumer spending, fearing a consumer with increased economic power could demand more freedoms.
Household consumption remains only 40 per cent of GDP, well below the global average and income growth has slowed.
The frenzied debt-fueled expansion of real estate and infrastructure that has driven China’s economic miracle was predicated on continued urbanization and an ongoing influx of foreign corporations moving in. Ms. Liu believes housing demand is in ‘perpetual decline’ and notes that corporations are no longer opening Chinese headquarters. The end result is an ongoing buildup of debt relative to falling asset values.
China’s demographic situation features a sharp drop in new family formation rates, an aging population and a record low fertility rate. Each trend presents a hurdle to consumption and overall economic growth.
Ms. Liu’s best anecdotal evidence of China’s decoupling from the global economy is the near-impossible task of finding a direct flight between New York and Beijing or Shanghai. She views the trend as less about global manufacturers deserting the country and more about geographic diversification for manufacturers. The end result is a significant decline in foreign investment in China.
Energy and materials stocks make up 30 per cent of the S&P/TSX Composite Index. China’s three-decade economic miracle has a provided a massive tailwind for investors in these market segments and this threatens to turn into a headwind to returns if the economic malaise continues.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
From stocks to bitcoin, soaring U.S. yields cast shadow over risk asset rally
Surging U.S. Treasury yields are sending shudders through riskier areas of the market, leaving investors to wonder how badly it will dent a rally that has lifted everything from stocks to bitcoin this year. David Randall and Lewis Krauskopf of Reuters report.
How safe are energy dividends?
Right now, several fossil fuel energy stocks offer attractive yields. But these companies share a common trait: their businesses are vulnerable to rapid swings in the price of oil and gas. The difference is in how they respond to these price movements. Some have made it a corporate priority to maintain their dividend even in the most difficult circumstances – Pembina Pipeline Corp. and Keyera Corp. are examples. Others raise or cut their pay-outs at the first sign of any significant change in petroleum pricing – Freehold Royalties Ltd. is a prime example. Gordon Pape takes a look at some mid-size energy firms and their dividend policies.
The Canadian economy is mired in weak fundamentals and investors are taking note
The Canadian dollar has broken sharply lower to below 74 US cents, back to where it was in late May. At that time, oil prices (WTI) were US$68 per barrel; today they are near US$80. The CRB index, which tracks commodity markets, was 540 in May and has since edged up to 550. So here we have seen the loonie go back to the same level it was three months ago when commodity prices were lower than they are now. David Rosenberg says this speaks to a downgrade of the domestic economy, and deservedly so. Here’s his harsh words for the state of affairs in this nation.
TSX forecasts reduced as downside risks lurk
Canada’s commodity-linked main stock index is expected to rise less than previously expected over coming months and could see a correction as investors grapple with a slowdown in China and higher borrowing costs, a Reuters poll of portfolio managers and strategists found.
Also see:
Poll suggests global stock market correction likely before year-end
S&P 500 to end 2023 up 17% but little gains seen between now and year end: poll
Copper trapped between old and new super-cycles
Copper may be poised to embark on a new energy transition super-cycle but it is currently struggling to escape the gravitational pull of the old Chinese super-cycle, as Andy Home of Reuters reports.
Also see: A look at the latest market trends in commodities
Others (for subscribers)
National Bank updates its ‘Dividend All-Stars’ portfolio
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: Multiple executives sell this soaring large-cap energy stock
Globe Advisor
How to play a looming copper bull market with demand set to rise
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Ask Globe Investor
Question: I’m wondering if there is a way to make money by exploiting the different dividend dates of similar companies. For example, Emera Inc.’s EMA-T dividend record dates are typically Feb. 1, May 1, Aug. 1 and Nov. 1, whereas the record dates for Fortis Inc. FTS-T are usually on the 15th of the same months. Until recently, I have had my utility-sector money split between the two companies. But with the staggered record dates, I realized I could have all my utility-sector money in Emera and then, after the record dates, I could sell Emera and put all my utility money in Fortis. Doing so gets me double the dividend payments compared to splitting my money between them. After the Fortis record date passes, I can switch back to Emera for the next quarterly cycle. Is this a sound strategy?
Answer: If it was a sound strategy, hedge funds would be borrowing billions of dollars to buy and sell Emera and Fortis – and every other dividend company where such an “opportunity” existed – and doubling their dividend income.
Sadly, the stock market doesn’t give away free lunches like that.
One obvious problem with this strategy is that you’d potentially be paying a lot of trading commissions and, in a non-registered account, capital gains taxes as you trade in and out of these stocks.
But leaving commissions and taxes aside, the strategy has a fundamental flaw: All else being equal, stock prices tend to fall right before the record date.
Let’s say you buy Emera in October with the expectation of holding it until the record date of Nov. 1, in order to lock in the next dividend payment. You then sell Emera and move on to do the same thing with Fortis. Free money, right?
Nope. Here’s the problem. When you sell your Emera shares, the buyer of those shares is not going to get the next dividend. That dividend is going into your pocket, not the buyer’s. The price of Emera will therefore fall (again, all else being equal) to reflect the fact that the dividend is no longer included.
So, what you gain in the dividend you lose in the price you receive for your Emera shares. The price adjustment actually happens one day before the record date, on what’s known as the ex-dividend date. (Stock trades take two business days to settle, so anyone buying on or after the ex-dividend date will miss the next dividend payment.)
Lots of other factors also affect stock prices, so the adjustment on the ex-dividend date won’t necessarily match the value of the dividend exactly. In some cases, the price might even rise. But the value of the dividend will no longer be reflected in the price.
Bottom line: You can’t game dividend dates to increase your returns. The market will make sure of that.
--John Heinzl
What’s up in the days ahead
Veteran former fund manager Tom Czitron will provide some advice on how to approach REITs as the sector struggles.
Earnings preview: Canada’s banks to show sluggish growth, lower profits
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff