Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
TD Cowen analyst Mario Mendonca previewed earnings for the domestic banks,
“We expect Q3/24E PTPP [ pre-tax, pre-provision ] earnings to increase 8% y/y, reflecting revenue growth of 5.9% (6.8% in Q2/24) and operating leverage of 1.6% (1.7% in Q2/24). Revenue growth reflects a good balance of mid-single-digit revenue growth across the three major revenue lines, including capital markets revenue, which, until last quarter, had been weak for almost 3 years. Prior to Q2/24, group operating leverage had been negative for 8 consecutive quarters. Improving operating leverage mostly reflects normalizing expense growth, supported by lower inflation and the restructuring efforts of 2023 … Valuation appears mildly attractive at best. We expect the Big-Five to remain at or below 10.5x P/E range (2025E) in the near term and potentially test 9.0x, if the market rethinks the direction of rates or the credit picture deteriorates more than just simple normalization of credit losses.”
Mr. Mendonca has buy ratings on Bank of Montreal, CIBC and Royal Bank among the big five.
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CIBC analyst Ian de Verteuil recommends clients adopt a defensive portfolio skew,
“Low Volatility (Low Vol) strategies in Canada have a strong long-term track record. Not only have these approaches delivered in-line or better than in-line returns compared to the broader market, they have also typically done this with lower volatility … The combination of falling interest rates, an unwind of some of the exuberance in the Magnificent Seven trade, and yen volatility helped Low Vol regain some of its relative performance after a somewhat disappointing year in Canada. In our opinion, given continued uncertainties, skewing equity portfolios to defensive businesses will continue to generate solid risk-adjusted returns in the medium term … In Canada, Low Vol strategies have tended to generate portfolios that look quite different from the broader equity market. Staples, Utilities and Communications stocks are overweighted, while Energy and Materials (except for pipelines and royalty companies) are normally eschewed.”
The analyst recommended ETFs as one option for low volatility exposure (while at the same time noting that pension funds are more sophisticated in their low volatility strategies): BMO Low Volatility Canadian Equity, Invesco S&P/TSX Composite Low Volatility Index, iShares MSCI Min Vol Canada Index and Fidelity Canadian low Volatility.
The analyst also provided a list of top 20 low volatility S&P/TSX companies: Metro Inc, Loblaw Cos Ltd, Waste Connections Inc, Great-West Lifeco Inc, BCE Inc, Fortis Inc, Thomson-Reuters Corp, National Bank Canada, Hydro One Ltd, TMX Group Ltd, Empire Co Ltd, CGI Inc, George Weston Ltd, Altagas Ltd, Element Fleet Management, Stantec Inc, North West Co Inc, Canadian Utilities, Dollarama Inc and Winpak Ltd.
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BofA Securities investment strategist Michael Hartnett sees the market as a bully of central banks,
“Wall St has now stopped Bank of Japan hiking; Wall St’s Aug/Sept goal now appears to be bossing the Fed into big rate cuts … lowest interest rate small businesses can borrow at is prime, and in real terms US prime rate is 6.5%, highest this century; higher-for-longer real rates slowly and decisively hurting US consumer & labor market … we say big cuts needed to work…note China 30-year bond yield at new all-time low … we remain in “sell the 1st cut” camp; leadership of AI set to wallow in H2 until EPS gains more visible … big opportunities in housing opportunities in UK, Canada, Australia, NZ, Sweden, all floating mortgage rate markets where transmission mechanism from rates to animal spirits much quicker than in US.”
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Diversion: “In world first, Russian chess player poisons rival’s board with mercury” – Ars Technica