Briefing highlights
- How high for the Toronto stock market?
- Ghosn arrested, to be ousted by Nissan
- A Doug Ford scene I’d love to see
- Markets at a glance
- Get ready for Red Wednesday ...
- ... and Black Friday
- What else to watch for this week
- Fairfax takes stake in Stelco
Wake up and pull the trigger already, Canada
— Brian Belski, Bank of Montreal
Brian Belski is still bullish on the Toronto stock market. It's the people buying the stocks who may not be.
Mr. Belski, chief investment strategist at BMO Nesbitt Burns, believes 2018 was a year of what might have been, that Canadian stocks should have done better, but that next year will still see gains on the S&P/TSX Composite Index as fundamentals win out.
“Instead of focusing on fundamental realities, such as improving earnings, contracting valuations and expanding dividends, investors focused on what they did not have,” Mr. Belski and his team said in their 2019 outlook.
“Namely, a rebound in oil prices, emerging market stabilization, a business-friendly policy shift in Ottawa, and an overall renewed foreign interest in Canadian equities,” they added.
“As such, the resounding attitude and question that has dominated the majority of our Canadian-centric client meetings in 2018 has been, ‘Why would anyone even consider investing in Canada?’”
Here's why they should, according to Mr. Belski, principal author of the report, and the rest of the team, senior investment strategist Nicholas Roccanova, investment strategist Ryan Bohren and associate Andrew Birstingl.
"According to our models, Canadian fundamentals are the strongest they have been in several years. For instance, earnings are consistently exceeding expectations and hitting new all-time highs, profitability is near peak levels, and estimates have been getting revised higher month after month."
Not only that, but ...
"However, the Canadian 'Eeyore' trade remains in full effect as the TSX hangs in limbo with fears surrounding slowing emerging markets, widening Canadian oil price spreads, and trade issues all weighing on TSX performance. As such, we believe the steep discount of Canadian equities provides investors with an attractive entry point given our broadly bullish outlook."
Mr. Belski’s original call was for the TSX to end 2018 at 17,600, though he revised that to push the target out further.
The BMO team's base case now sees the key index at 18,000 by the end of next year as "valuations normalize from current lows back to historical averages," corporate earnings rise, Canadian oil prices come back to life and the U.S. economy remains strong.
Their bull scenario would see the index surge to 20,500 amid stronger-than-expected global economic growth, far perkier corporate earnings, a breakout in crude prices and a softer-than-forecast impact from tariffs.
Then there’s the bear, or basket case, scenario, if you will, which sees 14,000 as U.S. growth flatlines, emerging markets weaken, oil prices falter, metal prices sink and “risk premiums remain elevated on continued global growth risk.”
That 18,000, by the way, would still see the TSX trailing the projected gains of the S&P 500, whose base case would see that benchmark end 2019 at 3,150. But it would still mark a fresh high.
"Furthermore, our base case could actually end up being too low if/when the triggers that everyone seems to be waiting for are actually pulled," the BMO outlook said.
“Indeed as long-term investors, we would not wait around and instead focus on a diversified list of companies that will benefit from continued regional strength (as America goes, so goes Canada), as well as preparing for a potential surprise domestic recovery in Canada.”
BMO economists noted in a separate report that the TSX has "persistently lagged" U.S. stocks.
If you look at the last five years, Toronto stocks have chalked up an annualized gain shy of 3 per cent, compared with almost 10 per cent for the S&P 500, said chief economist Douglas Porter, senior economist Robert Kavcic and Benjamin Reitzes, Canadian rates and macro strategist.
Of course, the pinch on oil prices isn't helping the cause, they said.
“While the Canadian market suffers from a lack of exposure to what has been working best this cycle (namely technology and consumer discretionary), weakness in oil and the differential have both played a role as well. Keep in mind that energy is still 18 per cent of the TSX versus 5 per cent in the S&P 500.”
Read more
- Jennifer Dowty: TSX at 17,600 by year end? Believe it, says BMO’s chief investment strategist
- The ‘frankly astonishing’ lost decade on the Toronto stock market. (Now, if you’d bought a house in 2008 …)
- Ian McGugan: The new economic numbers that suggest investors are right to be nervous
- David Berman: The week investors lost faith in Wall Street’s ability to keep the bull market charging ahead
- David Milstead: Pot stocks among the biggest decliners as markets tumble
- You ain’t seen n-n-nothin’ yet: Stock market stress could intensify if ‘real money investors’ capitulate
- Ian McGugan: Three things that could lead to the world’s next financial crisis
- Ian McGugan: Why are investors so gullible?
- Scott Barlow: Earnings growth is strong, so what’s with all this selling?
Nissan to oust Ghosn
Carlos Ghosn’s days at Nissan Motor Co. are numbered after his arrest and what the Japanese auto maker said were the findings of an internal probe into alleged misconduct by its chairman.
Another official is also involved, the company said today.
Its investigation showed that Mr. Ghosn, one of the best-known names in the industry and also the CEO of Renault, and the other official “have been reporting compensation amounts in the Tokyo Stock Exchange securities report that were less than the actual amount, in order to reduce the disclosed amount of Carlos Ghosn’s compensation,” Nissan said in a statement.
“Also, in regards to Ghosn, numerous other significant acts of misconduct have been uncovered, such as personal use of company assets.”
Chief executive officer Hiroto Saikawa will ask the board to “promptly remove” Mr. Ghosn from his positions, Nissan added.
“As if the European auto sector didn’t have enough problems, the surprise arrest of Renault CEO and Nissan chairman Carlos Ghosn has rattled shares in the French auto giant sending them to their lowest levels since 2014,” said CMC Markets chief analyst Michael Hewson.
“Coming as it does on the back of a shift in consumer car-buying habits, as well as the prospect of significant changes in the regulatory framework, the last thing one of the world’s biggest auto makers needs is the disruption caused by an investigation into the behaviour of a man who has towered over the global auto sector,” he added.
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A scene I’d love to see
Bill Morneau called me yesterday and asked when we were gonna balance the books
Chris Young/The Canadian Press
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Markets at a glance
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What to watch for this week
Let's call it Red Wednesday. Which will be followed two days later by Black Friday.
The first, because Ottawa's fiscal update is certain to continue spilling red ink. The second, because the annual post-Thanksgiving retail scramble in the U.S. tends to result in shoppers fighting over bargains, oft resulting in fisticuffs and black eyes.
On the first, economists expect to see Finance Minister Bill Morneau deliver a fall economic statement that’s long on deficits – long, as in a long time – and short on stimulus – short, as in falling short of U.S. tax reform.
Finance Minister Bill MorneauAdrian Wyld/The Canadian Press
"Despite a buoyant economy, any step the government takes away from the current fiscal path is likely to be in the direction of larger deficits," said Royal Bank of Canada chief economist Craig Wright.
“Ottawa long ago abandoned any pretense of balancing the budget in favour of targeting the debt-to-GDP ratio, which is a very weak fiscal anchor and encourages fiscal policy that exaggerates the economic cycle,” he added.
"This approach has enabled rapid growth in program spending, which averaged 6.5 per cent annually over the last three years from an average of 1.5 per cent in the preceding three years.”
This follows Ontario’s fiscal update last week, which pledged to tackle the deficit but with no timeline attached.
Economists like to see governments preparing for a rainy day by reining in their budget shortfalls in good times.
Observers also expect Mr. Morneau to move on the tax side, as many economists have cited the competitive issues Canada faces in the wake of the Trump administration’s measures.
"Although it’s only a fiscal update, not a budget, many are hoping Finance Minister Morneau will unveil at least a partial response to the competitive challenges posed by last year’s U.S. tax reforms," said CIBC World Markets chief economist Avery Shenfeld.
"In particular, markets are watching for a made-in-Canada version of the accelerated depreciation allowances provided to American corporates undertaking capital investments in that country," he added in a lookahead.
Recent comments, he said, "suggest that the government won’t fully match the 100-per-cent bonus depreciation in the U.S."
In the U.S., it’s a crucial Black Friday, warned CMC’s Mr. Hewson, in London.
In this Nov. 23, 2017, file photo, people wait in line for a Best Buy store to open for a Black Friday sale in Overland Park, Kan.Charlie Riedel/The Associated Press
Major American retailers "have struggled to keep up with changing consumer shopping habits," Mr. Hewson said.
“From the collapse of Toys 'R' Us to the bankruptcy of Sears last month, Black Friday is likely to make or break the years for further U.S. retailers. Already this year, store closures have been a feature of well-known brands like JC Penney, Macy’s, Walgreens, Gap and Sears.”
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Here's what else to watch for this week:
MONDAY
It promises to be a slow kickoff to a week that will slow down further for markets on Thanksgiving in the U.S.
Key, though, will be where oil prices head after the recent tumble and the wide differential between Canadian and global benchmarks.
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TUESDAY
Besides reports on October building permits and housing starts in the U.S., there are some notable corporate results, including Best Buy Co. and George Weston Ltd.
It will be interesting, too, as Lowe's Cos. can be expected to elaborate on its recent store closures, many of them in Canada, while we also get the latest from Target Corp., which, of course, famously has no stores in Canada.
Bank of Canada senior deputy governor Carolyn WilkinsAdrian Wyld/The Canadian Press
Carolyn Wilkins, the Bank of Canada's senior deputy governor, speaks at McGill University, and her comments "will be watched for hints as to whether the recent drop in oil prices has changed the BoC’s thinking regarding interest rate hikes," said CIBC's Mr. Shenfeld.
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WEDNESDAY
There are some second-tier U.S. and Canadian economic reports, results from Deere & Co. and Metro Inc., and, of course, Mr. Morneau's update after markets close.
THURSDAY
U.S. markets are closed, so it will obviously be a slower day.
Thus, a good day if British politicians want to own the headlines with, say, a non-confidence vote against Prime Minister Theresa May over her Brexit deal.
Britain's Prime Minister Theresa MayMatt Dunham/The Associated Press
That doesn’t mean there will be such a showdown, or that it could be Thursday, just that it would be a good day for it if anyone so chose.
Such a move would mean further angst among investors and more trouble for the pound.
A vote appears likely at some point, said CMC's Mr. Hewson. But "is the appetite there to unseat the prime minister, and who would take her place?" he added, noting any successor would face "the same unpalatable choices" over Brexit.
“For the last few days we’ve had MPs take to the airwaves criticizing what they don’t like about the deal, however, we’ve heard precious little about what they would vote for, and this is part of the problem, and time is running out,” Mr. Hewson said.
"Partisan politics is all well and good but on something as weighty as Brexit the country deserves better."
Also on tap is Japan's latest inflation report.
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FRIDAY
Besides watching for fights at U.S. shopping malls, investors will be eyeing Statistics Canada’s reports on October inflation and September retail sales.
Economists generally expect the report to show consumer prices rose 0.1 per cent from September, with annual inflation holding at 2.2 per cent.
The retail report is expected to show little change in the value of sales from a month earlier, but possibly a dip.
Michael Babad