Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO analyst Michael Markidis emphasized the benefits of weaker U.S. inflation on Canadian REITs,
“The soft US CPI reading on Thursday was a significant catalyst for the listed-property sector. For the week ended July 12, the S&P/TSX Capped REIT Index was +4.7%, notably higher than other rate-sensitive asset classes (utilities, banks, and telecos were +3.8%, +2.8%, and +2.0%) and the Composite Index (+2.8%). Strength was broad based. Each of the 16 index constituents was in the positive territory; 4 were up by >6% (NWH, AP, GRT, and CT). Key releases on tap for this week include the BoC’s Business Outlook and Consumer Expectations Surveys (July 15) and Canadian CPI for June 2024 (July 16) … Per CBRE, office conversions totaling 6msf have commenced in Canada since 2021. Redevelopment into residential comprises the majority (61%); the project list includes industrial (15%), education (7%), hotel (5%), life sciences (4%), and other (8%) uses. Calgary introduced programs to incentivize the conversion of vacant office space in its downtown core in 2021. The total pipeline includes 17 projects (13 active, 4 under review). More recently, the municipalities of London and Ottawa have rolled out incentives and/or new processes to facilitate conversions”
Mr. Markidis has “outperform” ratings on Granite REIT, Dream Industrial REIT, Flagship Communities REIT, Canadian Apartment Properties REIT, Boardwalk REIT, Killam Apartment REIT, InteRrent REIT, Minto Apartment REIT, Crombie REIT, BSR REIT, First Capital REIT and Choice Properties REIT.
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Scotiabank analyst Jason Bouvier sees a bright future for domestic oil producers,
“TMX [pipeline] has been operational since May, and differentials [between Western Canada Select and WTI crude] remained narrow through Q2. Robust FCF [free cash flow] (higher oil prices, lower Cdn diffs) and many companies at or near their net debt targets suggests increased shareholder returns. We continue to favor heavy oil producers given the positive egress outlook, coupled with heavy oil refining capacity additions outpacing supply growth. Further, oil sands players benefit from currently weak natural gas prices. Top Picks: CVE and IMO for large caps and VRN for SMID caps … there is potential for ~370 mbbl/d of pipeline optimization opportunities that could extend this timeline. Q2 WCS differentials have narrowed to $13.55/bbl (down 18% vs the 2021-2023 average), and we expect differentials to remain in the $13-$15/bbl range long-term … MEG, SCR, IPCO, and IMO have the most torque to stronger heavy oil prices..”
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Macquarie sales and trading strategist Viktor Shvets discussed the political events of the weekend and the apparent parallels to 1968,
“Today’s rising tide of political disorientation and polarization has historical parallels with 1968, the year when RFK, a democratic presidential candidate, was assassinated and MLK was murdered. It was also the year when LBJ decided not to run for the second term and when the Democratic Party convention in Chicago was wrecked by violent protests …despite unprecedented volatility and violence, the center held, and by the mid-1970s tranquility returned, with a new societal consensus solidifying by the late 1970s … Investors who bought shares in 1968, did not recoup real value of their investments until early 1990s Does it mean that today’s investors are facing a similarly dire predicament? The answer is likely to be in the negative. 1. 1968 was the beginning of a prolonged stagflationary era. While today’s inflation is volatile, none of the preconditions for stagflation are present. On the contrary, disinflation is the stronger force. 2. Today’s policymakers have a far greater control over economic and capital market cycles. 3. Although the 1970s had its high performance Nifty Fifty stocks, their current equivalents are powered by much stronger and more sustainable secular drivers”
Mr. Shvets added that a Republican sweep in the election would likely result in tax and benefits cuts that would increase both economic inequality and corporate profitability.
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I have a loose hypothesis that the characteristics of market cycles have irrevocably changed after the financial crisis.
Morgan Stanley global economist Seth Carpenter gets at this by discussing the failure of recession indicators in recent years,
“Rules for recession indicators have had a particularly tough time. We recently marked the two-year anniversary of the inversion of the 2y10y yield curve. While I have no doubt that at some point the US will go into recession, the rule that an inversion is the harbinger of recession has been violated. Similarly, when money supply growth (M2) turned strongly negative at the end of 2022, it was a clear sign of a slump for those who put stock in that measure of “money” or “liquidity.” Eighteen months later, money supply growth is positive again, and the economy remains solid. The ISM index has a long track record and over many cycles it has correlated well with activity, but it has been negative for 19 of the last 20 months without a recession. These false positives, to use a statistical turn of phrase, only reinforce how different this cycle is to those of the past … Our base case is that much like the other recession signals, the rise in the unemployment rate is another false positive”
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Diversion: “The ten best books since 2000?” – Marginal Revolution