Ajay Rajadhyaksha, Barclays global chairman of research, published his investment outlook recently with the surprising title Cash is still king. He believes that higher risk assets like stocks are unlikely to outperform when investors can generate over 5 per cent risk-free by sitting in cash.
An expected slowdown in global economic growth also lies behind the attractiveness of cash. Barclays expects ongoing sluggishness in China, stagnant economies throughout Europe and a mild slowdown in the United States and this will limit corporate profit growth.
Mr. Rajadhyaksha does not expect slower growth to result in lower borrowing costs. He sees higher for longer rates throughout Western economies and his conviction is strong enough to recommend a short position in two-year U.S. Treasury bonds (a bet on higher yields).
Separately, investment strategist Michael Hartnett from BofA Securities shared similar concerns about the relative attractiveness of cash and equities. He noted that the current earnings yield of the S&P 500 – the total earnings divided by the index level – is 4.6 per cent, roughly 0.9 of a percentage point below the yield on a U.S. T-bill. This is the lowest relative yield since the year 2000.
Mr. Hartnett emphasized that when the S&P 500 earnings yield is well above cash yields – it was 10 percentage points higher in 2009 – this is extremely bullish for equities. When the earnings yield is below T-bills, like it is now (and in August 2000 and July 2007), market volatility is often ahead.
I admit to being a bit unsettled after reading the Barclays and BofA Securities reports in rapid succession. Both perspectives bring up the unwelcome possibility that rate hikes have come so quickly that equities haven’t had time to adjust their prices lower to reflect the extra competition for higher-yielding risk-free assets. I am considering adding more cash - probably money market funds - to my portfolio.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Enbridge Inc. (ENB-T) The widely held Canadian dividend stock fell to four-year lows this week as investors fretted over the Canadian pipeline operator’s debt load from the surprise US$14 billion bid for three natural gas distribution companies from Dominion Energy. The deal announced on Tuesday is seen as a bet on the future of natural gas in a regulated market even as energy companies and consumers transition to a greener future by phasing out fossil fuels. Analysts, however, were surprised at the timing, the scale and impact such a deal would have on the company’s already leveraged balance sheet.
Also see:
Enbridge’s big U.S. acquisition comes with a trade-off of prioritizing revenue mix over debt load
Enbridge deal a boon for Bay Street bankers
Apple Inc. (AAPL-Q) Shares in the tech giant tumbled 6.4 per cent over two days this past week, wiping US$190 billion from its market capitalization, following news Beijing ordered some central government employees in recent weeks to stop using iPhones at work. But several Wall Street analysts on Friday said the selloff was overdone, saying any revenue hit for Apple would likely be small due to the phone’s popularity in China.
The Rundown
RBC lifts ban on sale of cash ETFs through its online trading platform
Royal Bank of Canada is no longer blocking investors from buying high-interest cash funds from its discount trading platform. As Clare O’Hara reports, RBC Direct Investing Inc. has notified do-it-yourself investors that they now have access to high-interest-savings-account exchange-traded funds, a group of third-party investment products it had previously banned for almost a decade.
Lower interest rates for investors? It’s already happening
Rates on investment savings accounts sold as mutual funds and high interest savings account exchange-traded funds have held steady in the aftermath of the latest Bank of Canada policy decision. But there’s at least one exception, and Rob Carrick says it’s worth noting because it offers a wake-up call for investors enjoying today’s excellent rates on safe parking spots for cash.
Over the long term, interest rates are going to stay high
Nominal interest rates are not going back below 3 per cent for the foreseeable future, argues investing Professor Dr. George Athanassakos. These long-term rates may go down to 3 per cent if there is a recession, but in the long run, they will exceed that by a wide margin. He explains why, and what it may mean for stock market performance.
Potential U.S. government shutdown could dent investor confidence
A potential U.S. government shutdown at the end of September could add to worries about the economy going into year-end and beyond, investors said. Past shutdowns’ impact on U.S. stocks has been slight. But Reuters reports that investors might be more sensitive to a shutdown this time around. Failure to pass a budget would highlight the gridlock and political instability that ratings agency Fitch cited as a reason for its downgrade of the U.S. credit rating in August, a move that roiled markets last month. At the same time, a shutdown could lead to spending cuts that may dampen the economy.
U.S. IPO market poised for strong finish in 2023 amid a flurry of listings
U.S. investors are awaiting a slew of initial public offerings (IPO) in coming months, hoping to ride the recent rally in equity markets. The deals could revive demand for new listings, which have been in the doldrums for nearly two years amid rising interest rates, higher inflation, geopolitical tensions and the Russia-Ukraine conflict. Here are the highlights.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: A U.S. investment strategy for market uncertainty
Number Cruncher: 24 multisector bond funds that have performed well with rising interest rates
UBS sees end of S&P 500 profit recession, index to 4,700 by June 2024
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Globe Advisor
International small-cap stocks set for a rebound with tech leading the way
Why more high-net-worth individuals are investing in art
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Ask Globe Investor
Question: My partner and I are transferring, in-kind, a series of non-registered investments – specifically, common shares of various Canadian and U.S. dividend-paying companies – from the transfer agents Computershare and TSX Trust to our non-registered joint trading account at a Canadian discount brokerage. The registrations on all of the accounts are identical. Is it safe to assume that the stocks are not considered sold and we are therefore not required to report any capital gains on our tax returns?
Answer: For tax purposes, moving an asset from one non-registered account to another should not trigger a taxable event, since there is no change in beneficial ownership and the shares are not being transferred to a registered account. It’s best to check with the transfer agent to make sure it doesn’t mistakenly report a disposition on a transfer out to the receiving discount brokerage.
--Jamie Golombek, managing director and head of tax and estate planning with CIBC Private Wealth
What’s up in the days ahead
Is Enbridge’s dividend safe in the wake of its blockbuster U.S. utilities acquisition this week? David Berman will weigh in.
Doves versus hawks: World market themes for the week ahead
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Compiled by Globe Investor Staff