Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
BMO analyst Sohrab Movahedi views domestic banks as undervalued and sees more dividend increases ahead,
“The bank index has been a noticeable underperformer in the past three months, with a total loss of approximately 14 per cent relative to the S&P/TSX’s total loss of 8%. The index is currently trading at 9.9x our 2023E EPS, the low end of the historical range of 10-12x. While it would not be surprising to us if the depressed bank valuations persisted in the shorter term, we believe each incremental data point (whether it be earnings results, inflation readings, or central bank rate decisions) should, on balance, be additive to investor confidence and supportive of a re-rating towards the mid-point of the historical P/E range … At current valuations, the Canadian bank index is trading at an attractive dividend yield of 4.1% (highest of 4.9% at BNS), which is 1.4x the 10-year GoC and 135% of the S&P/TSX yield. Put differently, if the re-rating relative to the market takes a bit longer, their dividend yield will provide some downside protection. .. We may see quarter-over-quarter dividend increases of 2%, 3%, 4% and 4% at CM, NA, RY, and LB, respectively. BNS, CM, NA, and CWB shares are rated Outperform.”
Morgan Stanley U.S. equity strategist Michael Wilson correctly predicted current market with his November 2021 “fire and ice” forecast where inflation is fire and slowing growth is ice.
Unfortunately, his mid-year outlook released Monday sees further volatility ahead,
“We’re in the midst of a hotter but shorter cycle in the US… The key implication here is that the early-to-mid-cycle benefits of positive operating leverage are behind us and earnings growth is likely to decelerate, driven by margin compression and slowing top-line growth. This dynamic is confirmed by output from our leading earnings model and the recent downward pressure we have seen in earnings revisions breadth. Coupled with decelerating PMIs, this downdraft in earnings growth we expect into next year gives us high conviction that our ‘ice’ scenario has arrived and it’s here to stay for even longer than we envisioned going into this year. This macro and earnings slowdown is happening at a time when the Fed remains very hawkish... We continue to believe that the US equity market is not priced for this backdrop, which we expect to persist. In fact, based on our fair value framework, the S&P 500 is still mispriced for the current growth environment. Based on our work, fair value ERP [equity risk premium] is approximately 40-50 bps higher than current levels, the fair value multiple is 1-1.5 turns lower and fair value price is ~3700-3800″
“MS’s Wilson: “This macro and earnings slowdown is happening at a time when the Fed remains very hawkish... We continue to believe that the US equity market is not priced for this backdrop, which we expect to persist”” – (research excerpt) Twitter
Citi European mining analyst Ephrem Ravi believes that the “mini-cycle” rally in commodity prices is reaching an end,
“Commodity prices are cooling off from their earlier highs, and mining stocks have rarely performed well against a backdrop of declining underlying commodity prices. In addition, the summer months tend to be softer for mining equities due to seasonality. Typically that is also the time-frame for sell-side capitulation as the street adjusts for mark-to-market prices and outlook.
“While the sector is generating decent cash flows at spot commodity prices and valuations remain undemanding, we believe the market could struggle to take a constructive stance till there are green shoots of recovery on the macro side. China lockdowns clearing and an eventual softening of zero-Covid policy are likely to be the bigger drivers (in addition to inflation softening in the western world). Our analysis of mining cycles indicates that the current mini-cycle may have peaked (or may be close to the peak). Among the diversified miners, Glencore has the most bullish sell-side bias with coal upside and shareholder returns as key catalysts in our view and we believe it could continue to play out well as balance sheet continues to strengthen and valuations remain attractive, though we flag that investor positioning on it has turned more positive than any time in the last 3-4 years.”
“Citi mining analyst Ephrem Ravi: “Our analysis of mining cycles indicates that the current mini-cycle may have peaked”” – (research excerpt) Twitter
Diversion: “Thomas Piketty recommends five great books to better understand the complex and always-evolving ideas underpinning economic ideologies and the historical changes they catalyze:” – Five Books
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