Equity markets took a bit of a beating last week on indications from the Federal Reserve that emergency-level monetary stimulus won’t last forever. Goldman Sachs U.S. equity strategist David Kostin, however, believes the damage will be limited by an upcoming wall of investment inflows from households and corporate buybacks.
In his Weekly Kickstart report, Mr. Kostin noted that a record US$5.5-trillion is now sitting on the market sidelines in money market funds in the U.S. Investors faced with the onset of the pandemic in early 2020 piled into money markets and this money has yet to flow back into risk assets.
Current market conditions make equities more attractive than bonds, and stock markets are expected to attract the majority of investment inflows. Goldman Sachs expects the 10-year U.S. bond yield to climb about half a percentage point to 1.9 per cent, negating capital gains (bond prices move in the opposite direction of yields) and leaving the level of income unattractive. Corporate bonds trade near record low yields relative to government bonds, the result of investors’ hunger for any excess yield they can find.
U.S. households were the largest source of equity demand in the first quarter of the year at US$172-billion and Mr. Kostin expects a total of $400-billion for the year.
Corporate buybacks are set to take over as the biggest buyer of equities. Announced buybacks of US$567-billion so far this year marks a record, well above the $200-billion for this point in 2020. Apple Inc. and Alphabet Inc.’s planned US$140-billion combined stock purchase helped establish the new high water mark. Goldman Sachs forecasts US$726-billion in total buybacks for 2021.
Domestically, the major banks are likely to lead the buyback trend. A recent report from The Globe and Mail’s David Berman cited Royal Bank CEO Dave McKay’s as saying that shareholder-friendly measures like buybacks and dividend hikes would occur as soon as regulators allow.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Dream Industrial Real Estate Investment Trust (DIR-UN-T) With declining interest rates, investors are scooping up REITs, and this one saw its units closed at a record high on Friday. The REIT offers its unitholders an attractive 4.7 per cent yield with a monthly distribution that has been maintained since 2013. It is anticipated to deliver a 9-per-cent total return (including the yield) over the next 12 months, and target prices have been moving up. Jennifer Dowty has this profile of the REIT.
The Rundown
‘I think this will be very ugly’ - Concerns grow as Canadians rack up record debt to play the stock market
Ultra-low interest rates and a powerful rally in asset values have encouraged Canadians to pile on record amounts of debt to invest in stocks, bonds and other financial instruments. And concerns are escalating that it’s not going to end well. Larry MacDonald and Darcy Keith report.
Recent pullback in commodity prices divides analysts
The blistering run in resource prices has fizzled out over the past couple of weeks, raising doubts over whether a commodities supercycle is in the works. What has been one of the hottest asset classes in the world coming out of the pandemic has run into a number of obstacles, including efforts by Chinese regulators to cool down commodity speculation, as well as a spike in the U.S. dollar. As Tim Shufelt reports, some market followers believe the setback will only be temporary.
Here’s how nervous investors should react as the impact of inflation hits equity markets
When it comes to inflation - probably the number one concern among investors right now - there has been a modest but discernible change in tone among central bankers of late. If we don’t see a drop-off in the rate of inflation by fall, the pressure for them to act will become more intense, writes Gordon Pape. What should you do in these circumstances? Gordon has some suggestions.
Also see: Investors eye a high mark in U.S. profit growth as inflation fears deepen
Fed shift causes rally in value stocks to wobble
The Federal Reserve’s hawkish shift is forcing investors to reevaluate the rally in so-called value stocks, which have taken a hit in recent days after ripping higher for most of the year. David Randall of Reuters reports.
Investors brace for annual Russell index rebalancing with pandemic imprint
Market participants are girding for probably the biggest trading event of the year this coming Friday, as FTSE Russell stages the final reconstitution of its indexes, and trillions of dollars in investments could be influenced by the event that will reflect a wild trading year marked by the pandemic and the “meme” stock craze.
Why South Africa stands out among emerging markets for investor returns
Despite recent weakness because of lower commodity prices and a stronger U.S. dollar of late, South Africa is one of the best-performing Emerging Markets in the world this year, with the MSCI South Africa Index climbing around 10% year to date, according to Bloomberg data. That is even more remarkable given that the country was once considered one of the “Fragile Five,” a term coined by Morgan Stanley in 2013, during the original “taper tantrum,” to describe economies reliant on foreign capital and therefore highly susceptible to higher interest rates. But not this year: the South African stock market has outperformed other EMs despite increasing global bond yields. Why the change? Regina Chi of AGF Investments went looking for answers.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Chairman continues large investments in this financial stock yielding over 3%
CI Financial’s Bill Holland is buying the stock’s rally
Globe Advisor
Could a growth setback be the surprise scenario for U.S. markets?
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Ask Globe Investor
Question: I returned to university to complete an MA in 2017. I used $18,000 from registered retirement savings plans via the Lifelong Learning Plan to pay the costs.
At this point, I have completed my MA (2019) and in my tax returns (2018, 2019, 2020) I received about $8,500 back on my taxes. I chose to not spend those dollars and instead put them into a savings account, making a whopping 2 per cent.
My question is, how should I be going about investing these dollars back into my RRSPs (or should I)?
Also, in my mind, my adviser should be commenting on this, but has not been in touch or in any way followed up. My wife and I direct a small, but consistent, allocation of family savings to our adviser and we have worked with them for about 15 years.
My question is: Does it seem odd that no one has followed up with me on these investment dollars? My wife and I understand that we’re relatively small-time (our adviser represents most of the wealthy folks in our somewhat small town), but we’d like to look at moving our money into the hands of a more communicative adviser.
Answer: Certainly that money should not be sitting in a savings account. Put it back in the RRSP and invest it conservatively – remember, an RRSP is really a pension plan.
Your adviser should be following up and making recommendations. You may not have a lot to invest now, but with your education you and your wife have the potential to become high-net-worth clients in the future. A good adviser should be motivated by that. Start by talking to your current adviser and expressing your displeasure. That may be all it takes to get the attention you need.
--Gordon Pape
What’s up in the days ahead
Robert Tattersall suggested some time ago that energy services stocks could be a highly profitable play - albeit one with significant risk. He returns with an update on that thesis later this week.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff