Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Morgan Stanley strategist Andrew Sheets made the case for bond investors in a Friday research report (my emphasis),
“Focus on stock-bond correlation misses a main way fixed income diversifies: Stock-bond correlation has been rising. While this dynamic raises fears that bonds won’t diversify, we think this overlooks how most portfolios experience fixed income diversification. A large part of the benefit to a 60:40 portfolio comes from bonds’ lower volatility and ‘not 1’ correlation, two elements that remain very much in place … Instead of whether fixed income can diversify, we think that the more practical question is whether low yields mean it is simply dead weight… Based on Morgan Stanley’s forecasts through end-2021, both government bonds and corporate credit should post positive returns, outperforming cash. Meanwhile, recent stock market gains mean that our full-year forecasts for equities imply returns lower than those in fixed income. Our forecasts imply that fixed income can still ‘do its job’ in a broader portfolio context.”
These points are well-taken, but investors should be aware that forecasts to year-end are extremely short term and market time-y.
“@SBarlow_ROB MS makes the case for bonds” – (research excerpt) Twitter
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BofA Securities head of research marketing and analytics Thomas Thornton published a timely report detailing how investors can benefit from the US$-2-trillion Biden infrastructure plan(my emphasis) ,
“Roads and highways are actually fairly a small part of Biden’s infrastructure plan at just under 6% of the total $2T proposal. Meanwhile, electric vehicles, mass transit, airports and Amtrak make up 18% of planned spend. This leads [us] to believe the bill as announced yields limited upside for aggregates and construction steel… Still [our analyst] points out that greater electrification and support for EVs can help copper & aluminum, benefiting AA & FCX… Julien Dumoulin-Smith notes the proposed extension of tax credits for solar and wind are a material positive for his broad coverage. [Residential] solar is one of the most impacted … Julien sees significant upside to POs for Buy-rated RUN and NOVA. As for the grid, transmission investment is already poised to accelerate materially this Fall – many key names to watch including AEE and XEL among many others principally in the renewable rich Midwest; watch NEE too here on some of their larger HVDC projects too… Batteries are great for ENPH in particular … The ongoing push for more domestic semi manufacturing benefits semicap equipment, including Buy-rated AMAT, while 5G/broadband, smart industrial/automation and clean energy/EVs benefit many of the semiconductor makers, Buy-rated NXPI and MRVL among them.”
“@SBarlow_ROB BoA: How investors can benefit most from Biden infrastructure plan” – (research excerpt) Twitter
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Scotiabank bank analyst Meny Grauman assesses the potential impact of OSFI’s proposed measures to slow down mortgage growth in Canada,
“By definition this proposed rule change is expected to slow down mortgage demand, and OSFI is on record as saying that it will be monitoring lenders closely to make sure that they do not extend amortization periods or increase debt service limits in order to work around this change … Already a number of economists have publicly stated that the impact should be relatively modest and that in the short run this rule change may even boost demand as some buyers likely accelerate their purchase plans ahead of the proposed implementation date on June 1st. Based on OSFI’s internal analysis of approved Q3 and Q4 borrowers, the change in the qualifying rate would result in a reduction in the mortgage loan amount between 2%-4% keeping amortization steady. In total the regulator estimates that up to 10% of borrowers may now exceed individual banks’ Total Debt Service ratio thresholds. Where Do We Go From Here: Although OSFI indicated that it was not looking at other mortgage rule changes at this time, whether that remains the case will certainly be dependent on how the housing market behaves in the coming months and quarters. "
“@SBarlow_ROB BNS: How will new OSFI mortgage rules affect bank stocks?” – (research excerpt) Twitter
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Diversion: “Best communities in Canada: Why Atlantic Canada comes out on top” – Maclean;s
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Scott Barlow