BMO senior economist Sal Guatieri detailed a five-part check on Canadian household balance sheets and found reasons for concern that likely have implications for Canadian stockpickers.
Mr. Guatieri began his report by noting that the two symptoms of financial stress – weak consumer spending and low confidence – are already apparent.
A November Conference Board survey of consumer sentiment found the second lowest result in 20 years. Inflation-adjusted consumer spending has slowed to about half of its historical average.
Income growth is the first part of the household finances check. The economist found that on the surface things look healthy as incomes rose 7.9 per cent year over year during the third quarter of 2023. However, most of the increase results from population growth – per capita real disposable income has actually fallen by 1.6 per cent in the past year. (Lower wages, fewer hours worked or less people working overall are possible explanations.)
Savings is part two of the test. Canadians have hoarded C$180-billion in excess savings since the beginning of the pandemic but this is largely limited to upper income homes. Savings for the bottom two income quintiles, those most likely to struggle financially, have dropped in the past few years.
Household wealth, part three of the stress test, is a success story. Thanks to housing and stock market gains, aggregate wealth for Canadians is 31 per cent above pre-pandemic levels.
Total household debt, part four of the financial check, is decidedly not a success story. The total debt to disposable income ratio remains close to the all-time highs at 182 per cent, which is bad enough. The lowest income quintile ratio is far worse at 317 per cent, according to the most recent data, up 35 percentage points in the last ten years. Canadians between the ages of 45 and 54 have strapped on the most debt in the past decade, pushing the debt-to-disposable income ratio 62 percentage points higher to 244 per cent.
High debt levels and rising borrowing costs have yet to increase bankruptcies, the final check point. Indebted households behind on their payments by 60 days is 2.2 per cent lower than before the pandemic. For residential mortgages specifically, only 0.2 per cent of debt holders are more than three months behind on payments.
Investors can expect financial stress to increase in the years ahead as mortgages are renewed at higher rates, creating hurdles for profit growth for consumer-facing businesses. Retail stores and lower quality mall operators are obvious examples.
As for the major banks, increased provisioning for credit losses will be able to absorb projected losses, but businesses within the banks serving consumers will likely see slower growth.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Canadians are bananas for not embracing index funds
Despite overwhelming evidence that index funds beat most actively managed funds over the long haul, Canadian investors still shy away from indexing. By doing so, they sacrifice returns. Ian McGugan has three theories on why so many investors are refusing to join the indexing bandwagon.
Investors see Microsoft’s stock market value leaving Apple behind
Microsoft’s (MSFT-Q) early lead in artificial intelligence has the software heavyweight’s stock market value poised to pull decisively ahead of Apple’s (AAPL-Q) over the next five years, 13 institutional investors unanimously agreed ahead of the tech titans’ quarterly results this week.
Hedge funds lap up China stocks at fastest pace in 5 years: Goldman
Hedge funds snapped up battered Chinese stocks over three days last week at the fastest pace in more than five years, according to Goldman Sachs. This surge in hedge fund interest in Chinese stocks coincided with Beijing stepping up efforts to restore confidence in the world’s second-biggest economy, which has been hit by a crisis in the property sector and weak growth. The shift in hedge fund positioning towards China adds to signs that a sentiment shift may be taking place.
U.S. election worries show up in newly listed volatility futures
Newly-listed volatility futures contracts are showing heightened expectation for stock market gyrations around this year’s presidential election in November, a sign that investors are already paying attention to the vote.
Are today’s young, diverse investors making good choices?
Nearly three-quarters, or 74 per cent, of Canadian Gen Zs surveyed reported holding at least one investment. This is markedly higher than U.S. Gen Zs at 56 per cent. But the most likely held investment was crypto. Preet Banerjee asks whether this could be setting them up for long-term failure.
Others (for subscribers)
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Monday’s analyst upgrades and downgrades
Ted Dixon: Olympia Financial Group insiders buy as stock rallies
Ask Globe Investor
Question: Should I hang onto my utilities stocks after the beating they’ve suffered?
Answer: Selling these stocks now would mean locking in some disappointing results, so the answer is yes. The S&P/TSX Capped Utilities Index lost 10.6 per cent in 2022 and then was basically flat in 2023. So far this year, the index pulled back again by a modest amount.
Behind these returns is the rising rate trend of the past two years. Investors tend to treat utilities shares like bonds – when rates go up, the price of these securities goes down. The Bank of Canada rate announcement earlier this week highlights the outlook for lower rates this year. A sustained decline in interest rates would be a big help to the utilities sector.
Utilities are a classic defensive sector - expect them to outperform if and when the economy finally does lapse into recession. Another reason to hang onto stocks in this sector is the dividend income. The S&P/TSX Capped Utilities Index yields about 4 per cent, which is reasonably good but not outstanding in today’s high rate world. It should be noted that the after-tax return in non-registered accounts would look comparatively better thanks to the dividend tax credit.
Utilities stocks tend to be dividend growers, so you should expect an increasing amount of income each year. Almost one-quarter of the S&P/TSX Capped Utilities Index is accounted for by Fortis Inc. (FTS-T), which last September announced a dividend hike for the 50th year in a row. The most recent increase came in at 4.4 per cent, which beats the latest inflation rate by a full percentage point (disclosure note: I own some Fortis shares).
Not all dividend stocks are as steady as Fortis. Algonquin Power & Utilities Corp. (AQN-T) slashed its dividend by 40 per cent a year ago, a move that hasn’t addressed investor concerns about the company. Algonquin’s dividend yield in late January was 7.3 per cent, which is quite high.
Buying an entire sector via exchange-traded funds is often a strong alternative to picking individual stocks. But in the case of utilities, the ETF selection is over-priced. Both the BMO Equal Weight Utilities Index ETF (ZUT-T) and the iShares S&P/TSX Capped Utilities Index ETF (XUT-T) have management expense ratios of 0.61 per cent. That’s ridiculously high for this type of simple index-tracking fund.
--Rob Carrick (Send questions to rcarrick@globeandmail.com)
What’s up in the days ahead
TFSAs are trouncing RRSPs in popularity, but is this trend overdone? Rob Carrick will share his thoughts.
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Compiled by Globe Investor Staff