Daily roundup of research and analysis from he Globe and Mail’s market strategist Scott Barlow
Morgan Stanley U.S. equity strategist Michael Wilson recommends defensive growth stocks for 2022,
“The re-rating is now happening via the equity risk premium (ERP) channel rather than rates as the equity market is smart enough to know that using current levels of either nominal or real rates to discount cash flows far in the future may be a colossal mistake given the pace of inflation and the Fed’s changing reaction function. Using our 1940s analogy, this re-rating in ERPs could have much further to go … The quality trade is now taking on a different complexion. In our year ahead outlook we recommended investors focus more on large cap defensive quality rather than growth quality. This recommendation was based on our view that the Fed and other central banks would begin to take away the punch bowl at an accelerated pace and that tapering is tightening for markets, if not the economy. Growth stocks would be more vulnerable to that tapering than defensive ones given their much higher valuations … Since November 15th the market has de-rated growth stocks as shown above. More importantly, defensive stocks have been the best performers by far … We believe this preference for defense is due to both Fire (central bank tightening) and the oncoming Ice (growth slowdown) that could be worse than most expect. Two of our overweight sectors (Healthcare and REITs) have been the top performers and we continue to favor both. Staples are also looking more interesting and we continue to favor Staples over Discretionary”
“MS recommends playing defense for 2022″ – (research excerpt) Twitter
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Goldman Sachs U.S. equity strategist David Kostin presented a list of stocks with the highest potential risk-adjusted returns according to the firm’s analysts,
“Uncertainty … exists among single-stock analysts and we identify companies with the largest disagreement in analyst price targets. Our High Sharpe Ratio basket (GSTHSHRP) contains stocks with the highest prospective risk-adjusted returns. The median constituent offers 2.6x greater return (32% vs. 12%), similar risk (32% implied volatility vs. 29%), and a risk-adjusted return 2x the S&P 500 (1.0 vs. 0.4).”
The stocks with the highest expected returns relative to implies volatility in each major market sector are Activision Blizzard, T-Mobil, Penn National Gaming, Sysco Corp., Citigroup, Medtronic PLC, Zimmer Biomet Holdings, Alaska Air Group, Global Payments, PayPal Holdings, LyondellBasell Industries, and AES Corp.
“GS: “Constituents of our newly rebalanced High Sharpe Ratio basket”” – (table) Twitter
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Scotiabank analyst Mario Saric uses a different methodology to assess Canadian rents relative to the rest of the developed world, with surprising results and one investment recommendation,
“[Our] days included $300 monthly rents and a healthy dose of fast-food, with Big Macs at the top of the list; unfortunately, no Grand Macs existed! We’re risking dating ourselves here, but $300 rents are no longer around, nor are $3 Big Macs. Home affordability is a hot topic globally amongst CAD Residential REITs. What better way to compare purchasing power parity globally then through Big Macs! Our conclusion is that Canadian rent affordability is comparable to developed peers. Furthermore, while we’re a bit cautious on CAD Residential REITs through Q1/22 (barring M&A), we see a good entry point brewing, although it may take until Q2/22 for unit prices to respond. Our near-term preference remains U.S. Sunbelt (i.e. TCN) and our top CAD pick remains IIP [Interrent REIT] … Canadian residential affordability is consistent with G7 average and above historical average; renting remains the cheaper option. We think the Economist’s Big Mac index offers a different way to think about global relative rental affordability (i.e. based on purchasing power parity). Based on the Index, we estimate monthly rent in Canada = ~200 Big Macs vs. ~240 in the U.S. and roughly in-line with 186 G7 average. The 200 figure in Canada is ~10% lower than the historical average. "
“Scotia: Canadian rents affordable acc to Big Mac index” – (research excerpt) Twitter
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Diversion: “When Saturday Night Live Tried to Keep the Lights On” – The Atlantic
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Scott Barlow