Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
CIBC bank analyst Paul Holden is not excited about the prospects for domestic bank stocks,
“Banks have rallied significantly since early November. The rally has been fueled by the peak rate narrative and expectations for a U.S. soft landing. The banks are now trading at a 5-per-cent discount to 5-year average P/Es [price-to-earnings], with consensus EPS reflecting a soft landing. We do not find the discount compelling considering potential downside risk to EPS if the Canadian economy does not perform so well next year. We only have one Outperformer in the sector, National Bank, premised on its defensive characteristics …We assume an average PCL [provisions for credit losses] ratio of 39 basis points in F2024, up from 29bps in F2023 and below prior recessionary peaks of around 65-70bps. Every 5bps change in PCL ratio impacts F2024E EPS by 3 per cent … Results versus consensus were mixed with three banks beating, two missing and one in line. Perhaps more telling was the decline in F2024 consensus EPS of 2 per cent on average, with every bank seeing a negative revision.”
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BMO chief economist Doug Porter points out that housing supply has not been a long-standing issue domestically,
“Even a cursory look at either the Bank’s own measure of housing affordability or rent inflation readily shows that there was no major issue prior to 2020. Yes, rents had picked up from extraordinarily low increases by 2019, partly because StatCan began measuring rents differently. But housing affordability was right in line with its long-run norm. The fire was lit by a combination of ultra-low interest rates and then the fastest population growth in 50 years. The Bank’s own measures of home vacancies and new building versus household formation show that the true problem only emerged very recently, and this is not a “long-standing” issue. Yes, we can look back now, with the luxury of hindsight, over the past five years and the addition of 3 million people and say we did not have enough supply. But even record levels of new starts in 2021/22 simply could not keep up with that sudden tidal wave of demand’
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BofA Securities investment strategist Michael Hartnett’s weekly Flow Show report usually contains some interesting data points,
“Biggest winners since Oct 27th inflection … bitcoin 30%, German DAX 16%, REITs 15%, 30-year UST 14%, EM bonds 8%… losers oil -18%, US dollar -2%, China stocks -3%... ultimately we say fall in yields from 5% to 3% = hard landing = bearish, we say Q4 “lower yields = higher stocks” flips to “lower yields = lower stocks” in Q1… markets say 71% probability of Fed cut on March 20th FOMC, 100% probability May 1st … what flips today’s “soft” narrative to “hard”: Crude: oil breaks decisively below $70/bbl, bear market in oil continues; Curve: inverted yield curve today but fast steepening to positively steep yield curve (another +50bps) always a recession signal”
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RBC Capital Markets analyst Bish Koziol uses forward PE ratio, price to book value, dividend yield, return on equity, profit growth rate and three month price change to rank S&P/TSX Composite stocks by value, growth and momentum.
The top five for value are Suncor Energy, Imperial Oil, Great-West Lifeco, IA Financial Corp., and Baytex Energy.
For growth, it’s Quebecor, Intact Financial Corp, Open Text Corp., Enerplus Corp. and EQB Inc.
The top momentum names are Stella-Jones Inc., Celestica Inc., Stantec Inc., Fortis Inc. and Prairiesky Royalty Ltd.
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The dominant pattern among Wall Street strategists’ year-ahead 2024 reports has been caution and JP Morgan’s prominent chief global markets strategist Marko Kolanovic is no different,
“Overall, we are not positive on the performance of risky assets and the broader macro outlook over the next 12 months. The primary reason is the interest rate shock (over the past 18 months) that will negatively impact economic activity. Geopolitical developments are an additional challenge as they impact commodity prices, inflation, global trade in goods and services and financial flows. At the same time, valuations of risky assets are expensive on average. Currently we have high equity multiples (by various estimates at least 3 turns of P/E expensive), low levels of volatility (investor complacency and excess supply), and tight credit spreads. Bond yields of 5 per cent or more present a high performance hurdle rate for other assets and strategies. For instance, in a very optimistic economic scenario, we can see equities outperforming bonds (or cash) by ~5%, while in a likely environment of declining growth or a recession, they could underperform cash by ~20%. Regardless of whether a recession happens or not, ex-ante, the risk-reward in equities and other risky assets is worse than in cash or bonds”
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Diversion: “It’s not just COVID anymore, or a triple-demic. Welcome to the ‘new norm’ of seasonal illnesses” – CBC
Scott Barlow