Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BofA Securities credit strategist Yuri Seliger made an interesting point about pension funds and asset allocation,
“Waiting for pensions. Interest rates reaching new cyclical highs should result in even better funded status for defined benefit (DB) pension plans. That in turn encourages such plans to lock-in the improved funded status by shifting assets from equities to fixed income, and potentially offloading the plan to an insurance company. In fact last week IBM announced such a risk transfer of 40% of their DB plan, or $16-billion of liabilities. The Fed estimates US DB plans owned $1.2-trillion of equities and another $0.3tr of mutual funds (also likely mostly stocks) as of 2Q-22. Hence accelerating DB plan de-risking could create significant demand for back-end corporate bonds.”
A widespread move from equities to fixed income by pension managers would form yet another source of stock market weakness.
“Pension shift out of equities (BofA)” – (research excerpt) Twitter
BMO economist Shelly Kaushik noted that higher mortgage rates have yet to affect home construction quite yet,
“Canadian housing starts may have taken a step back in August, but the report was consistent with underlying strength in homebuilding … The six-month moving average rose to a historically elevated 267k annualized units. Meantime, units under construction pushed another all-time high — all signs pointing to residential construction continuing to chug along. But, given the rapid cooling in the housing market, we expect to see construction slow down later this year and weaken in 2023. Still, demographic needs will likely support underlying housing demand over the medium term.”
“BMO: “Cdn Housing Starts Still Sturdy”” – (research excerpt) Twitter
Lisa Shalett, chief investment officer at Morgan Stanley’s Wealth Management arm believes that investors are too complacent and also warned that “Inflation Is Far From Tackled”,
“Bond investors saw higher-than-expected inflation and figured that the Fed will push the fed funds rate higher for longer. That led to higher real rates, a higher terminal value for fed funds and a two-year US Treasury yield of nearly 4%. You would have expected the stock market to react by lowering valuation multiples and marking down earnings estimates. Neither has happened. We are concerned about such complacency. When in June the real 10-year US Treasury interest rate approached 1%, prices were 5.3% lower and risks of global recession were lower, too. The latest inflation data shows accelerated pricing in services, so we think that inflation stays “higher for longer” and see the Fed’s job as far from done. Consider revisiting positioning in long-duration/growth equities where the risks of rising real rates, falling operating leverage and the strong US dollar may not be adequately compensated. Look for fairly valued dividend growers… while declines in gasoline and other commodity prices have helped dampen headline CPI, those dynamics have little impact on core inflation, which has continued to experience 0.5% month-over-month growth "
“MS Wealth Mgt: “Chart of the Week: Inflation Is Far From Tackled”” – (research excerpt) Twitter
Diversion: “Luxury cars seized from [Canadian] 23-year-old ‘Crypto King’ as investors try to recoup millions” – CBC
Tweet of the Day: