Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO real estate analyst Michaeil Markidis described the ‘lunch bag letdown’ of the first Bank of Canada rate cut for REITs,
“The S&P/TSX Capped REIT Index was down 1.5% for the week ended June 14, despite a 18bps decline in the 10-year GoC (to 3.28%). Notable outperformers included PMZ (+0.7%) and DIR (+0.5%); outliers at the other end of the spectrum were AP (-5.7%) and MHC (-4.3%). Canadian REITs continue to work through a prolonged period of adjustment to higher interest rates. The simple average FFO yield spread (~580bps) and implied cap rate spread (~350bps) for the 16 index constituents continue to grind higher from the cyclical lows observed in April 2022 and are in-line/closing-in on historical averages. First interest rate cut turns out to be a “lunch bag letdown”. For the first time in four years, the BoC implemented a 25bps cut on June 5, taking the key overnight rate to 4.75%. The S&P/TSX Capped REIT Index was up 2.0% on the same day. Market enthusiasm, however, was short-lived as the Index subsequently sold off and is now down 1.8% from the close on June 4″
Mr. Markidis has a lot of “outperform”-rated REITs – Flagship Communities REIT, Granite REIT, Dream Industrial REIT, Canadian Apartment Properties REIT, Boardwalk REIT, Killam Apartment REIT, Interrent REIT, Minto Apartment REIT, Crombie REIT, BSR REIT, First Capital REIT and Choice Properties REIT.
***
Goldman Sachs U.S. chief strategist David Kostin raised his 2024 target for the S&P 500,
“We raise our S&P 500 year-end target from 5200 to 5600 (+3% from current level) driven by milder-than-average negative earnings revisions and a higher fair value P/E multiple (from 19.5x to 20.4x). Our 2024 and 2025 earnings estimates remain unchanged but stellar earnings growth by five meg cap tech stocks have offset the typical pattern of negative revisions to consensus EPS estimates. We expect roughly unchanged real yields by year-e and strong earnings growth will support a 15x P/E for the equal-weight S&P 500 and a 36% premium multiple for the market-cap index. We also discuss four alternative valuation scenarios: “catch-up” (5900), “catch-down” (4700), further mega-cap exceptionalism (6300), and recession risk (4800)”
***
In a separate BMO report, senior economists Sal Guatieri and Robert Kavcic discussed Pathways to Affordability for Canada’s Housing Market,
“The current state of affordability in Canada has deteriorated sharply from what were reasonable pre-pandemic levels and is now stretched to the worst limits in over three decades. With the construction industry effectively operating at capacity, the deterioration reflects a multi-pronged demand crunch …. More households are leasing which, along with surging immigration, is causing rents to accelerate … . The regional split means that the quest to restore affordability is most acute for families in B.C. and Ontario, which are home to half of the national population … Returning affordability to pre-pandemic levels is going to take either plenty of time or a significant adjustment in rates, prices, and incomes. Our current base-case outlook sees: a gradual decline in five-year mortgage rates to around 4.25% from around 5% currently amid Bank of Canada policy easing but higher neutral rates, mostly flat home prices for the rest of 2024 before picking up to a modest 3% annualized pace through 2027, and sturdy per-capita income growth of just under 3% per annum, just below the two-decade norm. In this well-behaved scenario, affordability gradually improves but remains strained even by the end of 2027″
“Pathways to Affordability for Canada’s Housing Market” – BMO Economics
***
Diversion: “U.S. Military Ran Hundreds of Anti-China Twitter Accounts Spreading Anti-Vax Propaganda: Report” – Gizmodo