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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BofA Securities U.S. quantitative strategist Savita Subramanian is adamant that the bull market is in its late cycle stage – the bull market is almost over – and offers advice on how to play it,

“The [U.S. Regime] indicator dropped for the 13th consecutive month, breaching 0.5 but remaining in “Late Cycle” (slowing but still positive trends). Historically, once the indicator dropped below 0.5 (or if Late Cycle started below this level), it took an average of ~4 months to move into ‘Slowdown’ (weak and slowing trends). Applying this timeline today means Late Cycle persists through year-end… We find that later innings of Late Cycle (’Late-Late Cycle’ as we coin here) reward Value, Risk, Small Cap and Low Quality, where each has outperformed the benchmark 67% of the time … Late-Late Cycle is generally accompanied by building cost pressure/inflation, tightening policy, accelerating capex and decelerating consumption, all draws on free cash flow. Among sectors, Health Care, Energy and Industrials fared best here, all with a 67% hit rate and over 10% avg. alpha. As US strategists, we are overweight Health Care and Energy, and highlight that select Industrials could benefit from the likelihood of, in our view, a strong, long capex cycle already underway. Tech, Utilities and Staples fared worst during Late-Late Cycle, each lagging the index 67% of the time.”


Scotiabank analyst Himanshu Gupta warned clients “Don’t Start Bottom Fishing (yet)” in industrial REITs,

“Has the sector bottomed out relative to bond yields? Our answer – No, we don’t think so. Is there any growth premium left in Industrial REITs valuation? Our answer – Nopes, not anymore … In our view, the pullback in REITs has essentially been due to AFFO [adjusted funds from operations] multiple compression with the REIT sector now trading at 16.2x AFFO multiple vs 20.7x multiple earlier this year (essentially an all-time high). The AFFO multiple spread to GoC bond yields is now approaching historical average, and it seems that the AFFO multiple compression phase is well past its mid-point (or perhaps nearing its end). Given the spike in bond yields, the spread between REIT Sector AFFO yield and 10-yr GoC bond yield has narrowed to 299 bp versus an historical average of 439bp since 1998. During periods where the 10-yr GoC yield exceeded 3% (and ignoring GFC), the average historical spread was 390 bp. Today, an average 390 bp spread would entail another 2.1 pt decline in AFFO trading multiple or 10%-15% unit price downside.”

Mr. Gupta has outperform ratings on Summit Industrial Income REIT, Granite REIT and Dream industrial REIT.

“‘Is there any growth premium left in Industrial REITs valuation? Our answer – Nopes, not anymore.’” – (research excerpt) Twitter


Also from BofA, energy analyst Doug Leggate defended his US$100 per barrel forecast for crude,

“Despite all the machinations around supply, global inventories based on Kayross satellite data remain low – and notably declining by 17mmbls led by China. Global markets are not obviously flush with oversupply. There are obviously, multiple other factors that we have endeavored to distill into a series of directional or bull / bear risks. But one data point from our commodity team’s Global Energy Weekly published on Sep 2nd: that OPEC+ has regained the majority market share vs the rest of the world – the critical condition we believe provides OPEC+ cover to defend price versus competing or market share. BofA’s base case that assumes $100 oil in 2023 remains in place, underpinning our sector positioning that is to avoid risk at the front of the curve while selectively re-engaging at the long end of the curve.”

“BofA analyst defends $100 crude forecast for 2023″ – (research excerpt) Twitter


Diversion: “Three Big Things: The Most Important Forces Shaping the World” – Housel, Collaborative Fund

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