For all the attempts to write-off Donald Trump as a presidential candidate without conviction, markets have been taking him very seriously since he prevailed in the U.S. presidential election last week.
Rate-sensitive bank stocks have shot higher and utilities have sold off. But the bond market has made the most profound moves: Prices have fallen sharply, pushing yields virtually straight up – and it is hard to understate the importance of this.
Bloomberg News pointed out on Friday that the Bloomberg Barclays Global Aggregate Index of investment-grade bonds has fallen 4 per cent over the past two weeks, through Thursday. If that doesn’t sound eye-popping, consider this: That’s the biggest loss in at least 26 years – data for the index only goes back to 1990 – and it raises all sorts of questions about what investing strategies are going to work.
If bond yields continue to rise as prices fall, reflecting the bet that Mr. Trump’s policies will drive up inflation and interest rates, U.S. bank stocks will rally more and plodding dividend stocks will suffer. Some observers think this is a likely scenario, especially as the U.S. Federal Reserve responds with higher interest rates.
“The major fiscal stimulus that Mr. Trump plans would spur inflation, providing the central bank with more reason to raise interest rates significantly next year and beyond,” Capital Economics said in a note. “Indeed, we think that the Fed will act more aggressively than investors are anticipating, driving Treasury yields higher.”
They figure the yield on the 10-year U.S. Treasury bond is heading to 3 per cent by the end of 2017, up from about 2.2 per cent now. The open question, though, is whether markets will take the president-elect, currently ensconced in Trump Tower, as seriously when he enters the White House.
– David Berman
Three big numbers to note
1.9% The amount the Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, is up this week, after rising 2.8 per cent the previous week.
83% The chance traders are pricing in for the U.S. Federal Reserve to raise interest rates in December, according to Thomson Reuters data.
2.355% How high the yield on the 10-year Treasury notes rose on Friday, the highest level of the year. The yield has seen its largest two-week rise since November, 2001.
Stocks to ponder
Clearwater Seafoods Inc. Analysts think patience may be rewarded for this stock with a 33 per cent return forecast, writes Jennifer Dowty. Analysts believe that, in time, the share price will regain its positive price momentum. Analysts’ target prices suggest a potential price return ranging between 24 per cent and 49 per cent over the next year. Nova Scotia-based Clearwater is a vertically integrated company supplying customers with a variety of seafood such as scallops, lobsters, clams, coldwater shrimps, and crabs. It pays a 20-cent per year dividend, for a yield of 1.65 per cent. The four analysts who cover the stock have 'buy' recommendations. The average one-year target price is $16.13, implying the shares have 33 per cent upside potential over the next 12 months.
Automotive Properties REIT. This REIT features a 7.8 per cent yield, 85 per cent payout ratio and unanimous ‘buy’ calls, writes Jennifer Dowty. Automotive Properties REIT began trading on the Toronto Stock Exchange in July, 2015. The initial public offering price was $10 per unit. It trades at about $10.25 currently. The REIT pays unitholders a monthly distribution of 6.7 cents per unit, or 80.4 cents on a yearly basis. The average one-year target price is $11.67, implying the unit price has 12 per cent upside potential over the next 12 months.
Fortis Inc. An undervalued stock with 43 years of annual dividend increases, writes Jennifer Dowty. This is a dividend stock that has come under recent pressure due to rising bond yields. The share price has fallen five per cent since the U.S. election results were announced, and the stock appeared on Wednesday’s negative breakout list. As a result, its valuation is becoming more interesting. The company pays shareholders a quarterly dividend of 40 cents per share, or $1.60 per year, equating to an annualized yield of 3.96 per cent. It has targeted an annual dividend growth rate of 6 per cent through to the year 2021. The average one-year target price is $49, implying the share price has 21 per cent upside potential over the next 12 months.
The top winners and losers from the TSX earnings season
The latest earnings season in Canada has largely wrapped up, and while Jennifer Dowty writes that she would term the results as broadly uninspiring, there were some clear winners and losers. Over all, there was a slight improvement in the earnings results of stocks within the S&P/TSX composite index. During the period between Oct. 4 and Nov. 15, 46 per cent of companies reported sales that beat the Street’s expectations and 53 per cent of companies reported better-than-expected earnings, according to Bloomberg data. She looks at some of the winners and the losers in this earnings season.
Three investing lessons to be learned from Valeant’s stunning fall from grace
The most amazing aspect of the troubles at Valeant Pharmaceutical International Inc. is that they are anything but amazing for those who have been following the company, writes Ian McGugan. Analysts, most notably Dimitry Khmelnitsky at Veritas Investment Research in Toronto, started sounding alarms about the drug-maker’s accounting as far back as 2011. The catalogue of Valeant critics grew and, by last year, included well-known short sellers, such as John Hempton of Bronte Capital, as well as journalists such as my colleague David Milstead. Yet none of that prevented Valeant from briefly becoming the most valuable company in Canada during the summer of 2015.
Goldman's top investment ideas for 2017
Goldman Sachs released its top six trade ideas for 2017 Thursday. In some cases – a stronger U.S. dollar and higher bond yields – the forecasts are unsurprising to the point of conventional wisdom. But there are other interesting ideas that were less predictable, notably a bullish view on European dividend swaps, writes Scott Barlow.
These Canadian industrial stocks are set to benefit from Trump win
One of the market’s early verdicts on last week’s surprise election result is that Donald Trump’s presidency will be good for construction and industrial stocks. A little more than one week since Mr. Trump’s upset victory, the U.S. industrials sector is second only to financials in rising by 5 per cent since election day – and 8 per cent since the week prior to the vote. The positive view on the sector has spread to the Canadian market, where industrials have advanced by more than 2 per cent despite a shoddy earnings season. There are a number of potential Canadian winners from this potential infrastructure boom, writes Tim Shufelt.
Betting that Trump will be a disaster? Then buy these two stocks
Betting against Donald Trump has been, so far, a loser’s game. So the market consensus seems to be that the president-elect will preside over an enactment of broad swaths of the free-market agenda, plus a major rollback of three decades of free trade. You may choose to sit on the sidelines and watch it all play out, given Mr. Trump’s record of proving his critics wrong. But as both a contrarian and as someone who still sees the man as an authoritarian vulgarian, David Milstead writes that he's willing to put some money behind the idea of a spectacularly failed Trump administration. To de-Trumpify my portfolio, he's cashing out of U.S. financials, which he see as having experienced an unjustified boost this past week, and plowing the gains into a couple of stocks that have been punished for their close ties to Mexico.
Investors should prepare for the end of the markets’ love affair with Trump
What do you do when you’re worried about Donald Trump but you can’t help but notice that the stock market seems to like him? Canadian and U.S. stocks have been resilient since Mr. Trump’s surprising victory in the U.S. presidential election last week, writes David Berman. Clearly, markets are warming to many of Mr. Trump’s campaign promises, by embracing the impact of lower financial and environmental regulations. But joining the rally means you probably have to stay nimble.
Why blue-chip financial firms are sweetening the deal for preferred shares
Banks and insurers want capital, and they’re willing to pay for it, writes David Berman. Manulife Financial Corp. announced on Monday a new preferred-share offering that will yield 4.85 per cent, which is big enough to appeal to everyone from the sophisticated pension fund to the individual retail investor looking for income. But more important, the yield supports a trend that has seen other Canadian blue-chip financial firms offering similarly generous terms on their preferred shares, shining up this beleaguered asset class.
Dividend stocks aren’t dead – they’re just resting
You mean dividend stocks can actually – gulp – go down? In the four days following Donald Trump’s unexpected election victory, shares of many classic dividend payers – including utilities, pipelines and telecoms – didn’t just go down. They got clobbered in a sell-off that some say was long overdue. John Heinzl writes that his Strategy Lab model dividend portfolio has the bruises to prove it. Among the hardest-hit stocks were Fortis Inc., down 7.6 per cent, Enbridge Inc., off 5.1 per cent, and BCE Inc., which skidded 4.4 per cent. For dividend investors who have gotten used to watching their stocks go only one way – up – the reversal has served as a wake-up call that even the strongest, most reliable businesses are vulnerable to the changing political and economic winds.
Are ETFs and robo-advisers killing active management?
George Athanassakos writes that he is a firm believer in stock picking. He thinks stock picking, with the right process and the right temperament, works. Stock pickers, at least the ones he tracks, in the long run tend to outperform. As a result, the growth in exchange-traded funds, which are investment funds that trade like common stocks and normally “passively” track an index, has been troublesome to him. The number of ETFs listed on the Toronto Stock Exchange has more than doubled since 2011. Pundits forecast these trends to continue, both in terms of asset growth and number of new players entering the marketplace. And the advent of robo-advisers will intensify the shift from active to passive management. So, is active management doomed? He does not believe so. The more investors use ETFs and robo-advisers, the larger the mispricing of individual securities and the larger the opportunities for active managers – such as value investors – to outperform.
The week's most oversold and overbought stocks on the TSX
The S&P/TSX Composite finished the trading week ended Thursday with a gain of 0.6 per cent. According to Relative Strength Index (RSI), Scott Barlow's favoured short-term technical indicator, the benchmark is in neutral territory. The RSI reading of 57 is close to middle ground between the oversold buy signal of 30 and the sell signal of 70. There are fewer oversold, technically attractive index members this week than I expected at 13. Fairfax Financial Holdings is the most oversold benchmark constituent and the real estate sector, still struggling with rising bond yields, is well represented. Boardwalk REIT, Smart REIT and Allied Properties REIT are all on the list.
Contra Guys: Why these two stocks stood out on our lengthy watch list
Contra Guys Ben Stadelmann and Benj Gallander say two keys to being a good investor are to be organized and to do lots of research. One way we do this is by keeping a Stock Watch List, which currently has about 300 companies on it. While that appears to be an enormous number of enterprises to keep track of, it is simplified by dividing the file into the categories of “December Buys,” “Triple A” and “Double A.” Right now December Buys are in focus and they look at two potential companies on their list: Ciber Inc. and Otelco Inc.
Eye on Shorts: What bearish investors are betting against
Here's a list of the largest short positions on the TSX as of Nov. 15.
Lipper Fund Awards
Award-winning PenderFund manager has a knack for identifying tech ‘sellouts’
For a Canadian tech investor, there’s big upside to the “sellout culture.” The tendency of Canadian tech companies to sell in recent years rather than continue to build has provided one windfall after another to well-positioned money managers, writes Tim Shufelt. David Barr, chief executive officer of Vancouver-based PenderFund Capital Management, has seen 39 holdings in one fund he manages bought out since inception. “That’s a big reason we’re talking right now,” he said. As manager of a tech-focused small cap fund, Mr. Barr was recently given a pair of awards for best-in-class performance.
Dodging energy crisis helped Mackenzie fund managers beat their peers. Why they're still cool on the sector
Crude oil prices have been so dominant in the Canadian market over the past few years, that merely avoiding the worst of the crash would be sufficient for investors to beat most of the market, writes Tim Shufelt. Mackenzie Financial’s Canadian growth team was able to do just that. “You could see that supply constraints were coming off, and it was relentless,” said David Arpin, a portfolio manager at Mackenzie. That call propelled a pair of funds that Mr. Arpin helps manage to the top of the industry in terms of returns.
How an award-winning Mawer fund manager is investing for a slow-growth future
Investors may need to lower their expectations in the years ahead, according to Vijay Viswanathan, director of research at Mawer Investment Management Ltd. Mr. Viswanathan, who is also co-manager of the Mawer Canadian Equity Fund, which focuses on large-cap stocks, believes slower economic growth will continue, writes Brenda Bouw. More protectionist policies, including those promised by U.S. president-elect Donald Trump, could also mean less global trade, which could negatively impact Canadian importers and exporters. He says Mawer, a winner at the recent Lipper Fund Awards in recognition for strong performance in several of its equity and balanced funds, will stick with “steady-eddie” companies that make good investments over the long term.
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What’s up in the days ahead
Our markets analyst Scott Barlow will take a hard look this weekend at the market consequences of Donald Trump's win and what it might all mean for your portfolio. Fund manager Larry Sarbit will explain what an "equity bond" is, and why investors should be on the hunt for it. And, if you're wondering what Canadian retail executive Christine Day has in her personal portfolio, we'll have the answers.
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