Strategists and economists from major research houses are almost universally pessimistic about the market outlook, but there’s one important exception – the strategist I trust most is bullish.
The majority of research this week was depressing. Jim Reid, Deutsche Bank’s Global Head of the Fundamental Credit Strategy Group, predicted a multi-decade period characterized by low economic growth, higher inflation, and '‘equities outpacing bonds but lagging long-term [average] returns."
Citi’s Mark Schofield and Willem Buiter weren’t a barrel of laughs either, writing “weak growth, sluggish trade, limited policy options and ongoing search for returns in an ultra-low rate world are powerful [investment] themes."
Richard Bernstein, who I’ve called "the best strategist working" a few times, is far more constructive. In a recent report , he writes, “There is a broad consensus that equities are in a 'low return environment'… Fears that returns would be lower than normal have fostered grave misperceptions that have hurt overall portfolios’ performance. Despite investors’ fears, this cycle’s returns have actually been quite normal.”
Mr. Bernstein recognizes the markets’ high valuation levels, but believes this is normal for the middle of a market cycle. He expects that the correction will not be a market decline, but a surge in earnings growth that will make valuations more attractive.
It’s difficult for investors to be optimistic when markets are volatile. But betting against conventional bearish wisdom, and allocating a small portion of portfolio assets to growth oriented, economically sensitive stocks, appears a reasonable bet in the current environment.
-- Scott Barlow
Three big numbers to note
$14-billion The fine levied against Deutsche Bank by the U.S. Department of Justice over claims that the German bank missold mortgage-backed securities.
$42.74 The five-week low West Texas Intermediate crude reached during trading Friday.
5.7% The decline Friday in the CBOE Market Volatility index, Wall Street’s “fear gauge.”
Stocks to ponder
Apple Inc. Jennifer Dowty writes that if she screened U.S. stocks, this one would be on the breakouts list. It trades at an attractive valuation, pays investors a reliable dividend and is a market leader. And Friday marks the official launch date of the new iPhone 7 and iPhone 7 Plus. Reports of strong demand for the new phone have rejuvenated the stock price.
Waste Connections Inc. This stock has been holding ground while other stocks fluctuated in the wake of the recent market turbulence, and if the stock pulls back a bit it could be a buying opportunity, writes Jennifer Dowty. The company, formerly known as Progressive Waste Solutions Ltd., core business offers solid waste collection, solid waste disposal and transfer, and solid waste recycling services. It recently reported better-than-expected financial results, it has strong cash flow and is on the search for acquisitions. It pays a dividend of 58 cents per, for a yield of 0.76 per cent, and has increased its dividend each year since 2012. Currently, 19 analysts cover the stock and 15 have “buy” recommendations while four have a “hold.”
North West Co. Inc. This retailer of food and general merchandise through store banners including Giant Tiger, just emerged from the negative breakouts list and is facing some challenges, writes Jennifer Dowty. The company recently reported disappointing quarterly results, and, while initially its stock sank, it has now stabilized. It pays a dividend of $1.24 a year, for a yield 4.7 per cent, and has raised it every year since 2012. Six analysts cover the stock, five have a “hold” recommendation while one has a “buy.”
ORIX Corp. This financial services company looks like a sound investment, writes Validea Canada. It scores 100 per cent on the James O'Shaughnessy-inspired model based on earnings-per-share persistence, price-to-sales ratio and relative strength. ORIX is considered a "fast-grower" by the Peter Lynch-inspired model. It views the price/earnings-to-growth ratio of 0.23 very favourable.
Shopify Inc. The company’s software allows individuals to create an online store by subscribing to their platform, writes Jennifer Dowty. In August, Shopify, which went public in May of 2015, reported total revenues of nearly $87-million, up 93 per cent year-over-year, surpassing the consensus estimate of $80.6-million. Management says the company should be profitable by the fourth quarter of 2017. As an investment, Shopify is best suited to growth-oriented investors with a high risk tolerance.
How investors should play the proposed Agrium-Potash Corp. merger
The $36-billion (U.S.) combination of Agrium Inc. and Potash Corp. of Saskatchewan Inc. has been touted as a “merger of equals,” but shareholders of each company are still scratching their heads about how they might benefit, writes Brenda Bouw. Shares in each company have fallen about 6 per cent since the merger was officially announced on Sept. 12, suggesting market skepticism. How should investors play these stocks as the proposed merger, not slated to close until mid-2017, goes through regulator, court and shareholder approvals?
Are you an investing groundhog? It’s now your time to act
To stay safe, groundhog investors wallow in cash. The markets are always too high for them, or falling too hard. Cash is comfortable, even if it’s a money-loser on an after-inflation basis. Groundhogs, use September as an opportunity to decide exactly what kind of an investor you really are, Rob Carrick recommends. If you’re not interested in more stock market risk, then recalibrate your retirement planning to ensure you’ll accumulate sufficient savings. Without long-term stock market growth working on your behalf, you may need to step up the amount of money you put away.
Four years in, my dividends are still rising
Wow. Time flies when you’re counting your dividends, says John Heinzl as he reviews his buy-and-hold dividend Strategy Lab portfolio. It’s had some “gratifying returns.”
Doomsday, and how it might affect your investments
How would you invest if you knew the end of the world might happen in the next few hundred years? How would it affect your mentality? Peter Berezin of Montreal-based BCA Research has taken a deep dive into what this can mean to your investments, writes Tim Shufelt. This is not an ill-timed April fool’s joke, Mr. Berezin stresses, as even distant, extreme risks can influence investor behaviour today, at least at the margins.
Why vanilla is best when selecting a Canadian market ETF
Depending on which exchange-traded fund you use to track the Canadian stock market, you could be up 23.6 per cent in the past 12 months or down 0.3 per cent, writes Rob Carrick. The way to avoid surprises when buying the Canadian market is to stick to ETFs that track the biggest indexes, he says.
Eight brewery stocks brimming with growth potential
Beer is going through a renaissance and is showing significant growth. Hugh Smith takes a look at the best brewers to invest in and eight made the mark.
Why sell-off in emerging-market bonds could hurt Canadian equities
Global investors are fleeing emerging-market bond funds and this is bad news for the loonie and domestic equity markets, writes Scott Barlow. The recent sell-off in developing world bonds and currencies was significant, but not yet enough to reverse the positive trend for the year. Merrill Lynch strategist Ajay Kapur, however, expects further weakness in the near term. Mr. Kapur points to investor positioning (global manager overweights and underweights), technical analysis and put/call ratios, as signs that sentiment in emerging markets had become euphoric, paving the way for asset price declines.
Shopping for stocks? How to avoid a dud
A value trap is an investment that, for a while, looks too good to be true. A value trap is a stock that appears to be cheap because it is trading at low multiples, but the company is actually in trouble and the price may never recover. But even skilled value investors can be fooled. The nature of value investing is such that prospective buyers look beyond a company’s balance sheet, seeking signs of hidden virtue in a stock that other analysts might consider to be a dog. Sometimes these investors are right and their hunches pay off.
Ask Globe Investor
I am wondering if I should apply early for the Canada Pension Plan. I have an RRSP, a work defined benefit pension (but have only worked there for seven years so it won't be that much when I retire) and a $200,000 mortgage. I would like to retire in about six years, when I am 65.
The longer you wait to collect CPP, generally the higher your monthly benefit will be. That said, it is a complex topic with many angles to explore, so we forwarded your question to Doug Runchey of DR Pensions Consulting. Here’s what he had to say:
“The choice of when to start receiving your CPP should be part of an integrated financial plan for your retirement years, and it shouldn't be made as a stand-alone decision. What I would stress is that you fully understand what your real CPP choices are, because the estimates provided on your CPP statement of contributions (SOC) aren't always accurate.”
“In addition to having accurate CPP estimates, you should consider the following:
- How much savings do you have in your RRSPs, and what is your withdrawal strategy for them?
- Is there any reason to expect that you'll have a longer or shorter life expectancy than the average Canadian?
- Are you currently receiving a CPP survivor's pension, and if so are you aware of the "combined benefit" rules?
- How much will your DB pension be when it starts, and is it fully or even partially indexed?
- Are you in a higher tax bracket now then you will be after you stop working?
- Will the amount of your CPP affect the amount any other benefits you might be eligible for (e.g. Guarantee Income Supplement)?
- What are your spending needs now versus later?"
For further information, you can find an FAQ on the DR Pensions Consulting website at drpensions.ca/dr-pensions-faq.html
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
On Saturday, watch for Rob Carrick's take on a new firm offering low-cost investments and advice to rival robo-advisers, while John Heinzl will explain some of the answers to the tough questions from his investing quiz published last weekend. On Monday, Carrick will write about how teaching young people to deal with banks is one of the best financial tools you can give them; Rob McLister will look at variable mortgage rates; John Reese will look at four deep value names in the market right now; and Larry Berman will look at how inverse ETFs could help you manage in these rocky markets.
Click here to see the Globe Investor earnings and economic news calendar.
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