Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank analyst Mario Saric thinks a domestic economic acceleration will spur private real estate deals and then unlock value for REITs,
“We have cited higher private CRE [commercial real estate] transaction volumes as an important catalyst for REIT sentiment given that the current 25% average trading discount to our NAV has historically been a good entry point. In this edition of The REIT Stuff, we identify the relationship between private transaction volumes and REIT valuation and the key drivers of private transaction volumes … We think private deal volumes correlate most with REIT valuation metrics and are largely driven by economic activity (i.e., economy matters for REITs) and availability of debt, with Scotiabank Economics’ forecast of accelerating real GDP growth starting in Q2/24 being supportive of improving deal flow and REIT valuation over the next six to 12 months; we think this represents 15%+ upside for Canadian REITs on top of our average 2023A-2025E AFFOPU [ adjusted funds from operations per unit] CAGR [compound annual growth rate] of 3%”
Mr. Saric has “outperform” ratings on Canadian Apartment Properties REIT, Interrent REIT, Allied Properties REIT, Brookfield Corp., Crombie REIT and Brookfield Asset Management.
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BMO chief investment strategist Brian Belski forecasts relief ahead for domestic yield sectors,
“Under the backdrop of the first Bank of Canada rate cut and moderating long-term interest rates, we believe that the core defensive yield sectors, like Communication Services, Real Estate, and Utilities should be doing much better. In fact, these are three of the worst performing sectors year to date and all three of these sectors are posting year-over-year relative price performance below one-standard deviation of average. Additionally, our work shows that Communication Services and Real Estate are currently the two deepest value sectors in the TSX. As such, we believe the fears surrounding these sectors are likely overdone, especially as we believe the easing rate environment should begin to lift concerns around yield, elevated capex spending, and debt levels. Indeed, when we look at longer-term interest rates, our work shows these sectors should be performing much better. Since the April low in GoC 10-year yields, only Utilities have outperformed, while both Communication Services and Real Estate have continued to lag. Overall, we believe the easing rate environment should ultimately provide relief for these underperforming sectors in the second half of the year”
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RBC Capital Markets technology analysts published a 108-page report called RBC Imagine: A cross-sector view of GenAI that offered direct beneficiaries of the trend off the top,
“Similar to the PC, Internet, mobile phones, cloud computing or social media, we believe GenAI will follow as the next disruptive mega-trend … within technology, we expect GenAI to be a revenue enhancer and profitability expander with use cases in cybersecurity, customer service, digital marketing and design and creative. As we think about other sectors, we expect GenAI will improve the patient and provider experiences within healthcare, drive the adoption of cooling systems within industrials, accelerate growth in datacenter hubs in power, enhance personalization and supply chain optimization in consumer, etc. We believe the most notable direct AI beneficiaries within RBC’s coverage universe include Accenture, Adobe, American Electric Power, AES, Amazon, California Resources, CrowdStrike, DigitalBridge, Eaton Corp., GoDaddy, Hubspot, Infratil, Macquarie Technology, Meta Platforms, Microsoft, Moody’s, NextDC, nVent, ServiceNow, Shopify, Thomson Reuters, Verisk and Vistra Corp”
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Diversion: “What explains the weak growth in total factor productivity in non-renewable resource extraction industries?” – Worthwhile Canadian Initiative
Scott Barlow