Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Hugo Ste-Marie recommends a capital preservation strategy, the most bearish positioning you can have,
“Stand ready for a challenging 2H/22, where both equities and bonds will face headwinds. We would still favor a more defensive positioning in portfolios. Several institutional clients recently highlighted some discomfort regarding defensive stocks’ elevated valuations. While we recognize that defensive equities command a hefty premium, we believe their earnings could deteriorate much less than cheaper cyclical stocks if economic activity slows/contracts abruptly. Overall, we believe capital preservation should be top of mind.
“Asset mix. As feared, the mid-June to mid-August equity rally seems to be short-lived given the sustained deterioration in fundamentals. With short-term yields/cash yields rallying fast as the Fed tightens, the asset class is finally looking attractive on a standalone basis (ignoring inflation) … We’re trimming further our exposure to Financials-banks, Paper & Forest, while adding to Insurance, Communications and Utilities. Overall, our portfolio is OW Cash, Energy, Utilities/Pipelines, and Staples.”
“Scotiabank strategists turning bearish” – (research excerpt) Twitter
Morgan Stanley U.S. equity strategist Michael Wilson was among the first Wall Street pundits to predict market volatility back in late 2021. Now, he is sounding even more bearish,
“This year has been historically bad for stocks, but that is not a sufficient reason to be bullish… As bad as it’s been for stocks, it’s been even worse for bonds on a risk-adjusted basis. More specifically, 20-year Treasury bonds are down 24% YTD … Commodities have been a mixed bag too, with most commodities down on the year despite heightened inflationary concerns. To wit, the CRB RIND index, which measures the spot prices of a wide range of commodities, is down 7% YTD. Cash, on the other hand, is no longer trash, especially if one has been able to take advantage of higher front-end rates… Truth be told, as one of the more hawkish strategists on the Street last December, I never would have bet the Fed would be doing multiple 75bp hikes this year, but here we are. Don’t fight the Fed … Our more pessimistic view on the major index is based on analysis that indicates all of the 31% de-rating in the forward S&P 500 P/E that occurred from December to June was due to higher rates … Our leading earnings models are all flashing red for the S&P 500, and we have high confidence that the decline in NTM [next 12 months] S&P 500 EPS forecasts is far from over … Make no mistake, as the weather turns chilly this fall, so will growth, which will weigh mightily on stocks given the paltry ERP [equity risk premium] investors are getting paid to take this risk.”
“MS’s Wilson .... still bearish” – (research excerpt) Twitter
Also from Scotiabank, bank analyst Meny Grauman published some interesting observations about his sector along with his top picks,
“Third quarter bank reporting season was peculiar in one respect: the market’s absolute fixation with [profit] margin expansion to the exclusion of almost everything else. On the face of it, the obsession with margins this quarter may be hard to understand, but if we take a step back and consider the broader macro context in which we now find ourselves, it begins to make a lot more sense. The reality is that while bank results themselves continue to show no real signs of recession, investors remain (rightly) uncertain about just how big an impact rapidly rising rates will have of underlying economic growth in the quarters ahead. In that context investors see market-related revenues already under pressure, loan growth likely to slow materially even if it hasn’t really done so just yet, and PCLs [ loan loss provisions] heading higher even if it is yet unclear if they will spike. In that context, the only real earnings driver that is poised to continue to push numbers higher is expanding margins as central banks continue to hike rates. In this uncertain economic environment, the market has put a spotlight on margins precisely because it is the one thing that seems to matter most right now… RY remains our top pick both for its upside to rising rates on both sides of the border, but also for its defensive attributes … We also continue to like BMO for its good margin upside (especially in the US) and the expected boost to EPS growth coming in 2023 from the Bank of the West deal”
“Scotiabank’s top picks for domestic banks” – (research excerpt) Twitter
Diversion: “Your brain is not an onion with a tiny lizard inside… It’s actually an onion with a demon inside " - Twitter/Sage Journals
Tweet of the Day:
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.