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There are two broad schools of thought among strategists regarding the future course of global equity markets.

The first, typified by Morgan Stanley’s Andrew Sheets and Michael Wilson, believes corporate profit growth has peaked, global economic growth is set to moderate, and that uncovering stocks representing continued earnings growth is set to become a much more difficult task.

The second school I’ll call the Richard Bernstein Tree. Mr. Bernstein is the former chief quantitative strategist at Merrill Lynch and now heads his own firm, RB Advisors. Mr. Bernstein, along with his former co-workers Brian Belski (now chief strategist at Bank of Montreal) and to a lesser extent Savita Subramanian (current chief quant strategist at Merrill) argue that global economic and profit growth are in the process of accelerating, along with bond yields and inflation pressure.

The Morgan Stanley thesis has an advantage in that a number of trends they predicting at the beginning of the year – notably higher market volatility and lower price earnings ratios despite strong earnings growth – have come to pass. That said, from a strictly objective point of view it wouldn’t surprise me if either of the forecasts ended up accurate.

I have psychological biases that are pushing me towards the Morgan Stanley view and I need to guard against these. There are rules of thumb, or what Daniel Kahneman called ‘heuristics’ in Thinking Fast and Slow, like ‘the post-crisis rally in U.S. equities and the Canadian housing market have been going on so long something has to change soon’ that make the notion of peak profits and the end of the rallies attractive.

It’s part of my job to find inflection points for asset price trends and it’s possible to be looking so hard for them that they seem to appear where they don’t actually exist.

All investors have biases like these. I strongly suspect a lot of investors in Calgary are predisposed to Mr. Bernstein’s view because accelerating global economic growth implies sharply higher oil and general commodity prices. (As an aside, a Goldman Sachs report entitled The case for commodities strengthens hit my inbox literally while typing this paragraph, so commodity bulls could very well be on solid ground despite any biases).

Heuristics and analysis shouldn’t be confused so what we can do is watch the data in as emotionless a way as possible. Softening in regional purchasing managers indexes for manufacturers would support Morgan Stanley’s view, as would a continued drop in year-over-year profit growth and price-to-earnings ratios. Strengthening inflation data and commodity prices would validate the Bernstein, Belski, Subramanian outlook.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Vermilion Energy Inc. (VET-T). There has been turmoil in the global oil patch as the supply-demand imbalance is narrowing and some Canadian oil stocks are benefiting, including Vermilion, which is raising its dividend by 7 per cent to 23 cents a month ($2.76 a year), effective with the May 15 payment. At a price of $44.10 (May 11), that translates into a very attractive yield of 6.26 per cent. Gordon Pape explains why it’s one of his favourite energy stocks right now. (for subscribers).

Pizza Pizza Royalty Corp. (PZA-T). Pizza Pizza promotes its food as “hot and fresh.” But lately, its publicly traded shares have gone staler than a day-old pie. Since John Heinzl launched his Yield Hog Dividend Growth Portfolio at the end of September, Pizza Pizza Royalty Corp. has plunged about 19 per cent, making it the worst performer in the model portfolio. Why is Pizza Pizza Royalty – which had served up solid returns for years – suddenly losing so much dough for investors? John Heinzl explains (for subscribers).

Photronics Inc. (PLAB-Nasdaq). As a long-time value investor, Robert Tattersall doesn’t often have a reason to analyze and invest in technology companies: These stocks often trade at extravagant multiples of book value per share and have an insatiable appetite for additional equity as they seek a foothold in an emerging industry. But, he recently made an exception in the case of Photronics Inc. After all, who wouldn’t be attracted to an US$8 stock trading at a 25-per-cent discount to tangible book value, with US$450-million in revenues in a US$4-billion industry and cash on the balance sheet of US$350-million? Photronics manufactures photomasks, which are used as stencils to transfer circuit patterns onto semiconductor wafers in the making of integrated circuits and flat panel displays. Robert Tattersall explains (for subscribers).

The Rundown

Bond yields are ruining the year for safety-first, dividend-hungry investors

Any risk-averse investor who has hunkered down with stable, dividend-spinning stocks must be wondering what upside-down world they’re living in: Safe investments are being clobbered – again − as bond yields rise to multiyear highs. Market activity on Tuesday underscored the trend. The S&P 500 fell 18.68 points, or 0.7 per cent, retreating from a two-month high and breaking a four-day winning streak. Were investors running from economically sensitive stocks and into the sort of companies that can thrive during periods of uncertainty? Uh, no: U.S. financials fell just 0.2 per cent while traditionally safe high-yielding utilities and real estate investment trusts fell 0.9 per cent and 1.7 per cent, respectively. The divergence follows substantial moves in Canadian and U.S. government bond yields, which are anticipating additional interest-rate hikes by central banks. David Berman explains (for subscribers).

Two stocks a $8.5-billion TD fund manager is buying - and one he’s given up on

David Sykes likes dividend stocks, but it’s not the yield he’s watching. Instead, the managing director and head of fundamental equities at TD Asset Management prefers to focus on a company’s dividend growth and how sustainable it is. Mr. Sykes manages $8.5-billion across five funds, including TD’s North American Dividend Fund. That fund returned 5 per cent in the 12 months ended March 31 and, on an annualized basis, 13.8 per cent for the previous five years and 8.5 per cent over the past 10 years. The Globe and Mail recently spoke with Mr. Sykes about the stocks he’s been buying and selling, with a focus on U.S. companies, and the one stock he wished he added to when its price sank last year. Brenda Bouw reports (for subscribers).

BMO to launch its first actively managed ETFs this month

BMO Global Asset Management is set to launch four actively managed exchange-traded funds mimicking investment strategies already sold through its mutual fund division. The bank has already received regulatory approval for the ETFs and expects to launch all four by the end of May. They include three fixed-income funds and one global equity fund that the bank already sells to investors in a mutual fund offering. The ETFs are: BMO Women in Leadership Fund (WOMN), BMO Global Multi-Sector Bond Fund (ZMSB), BMO Core Plus Bond Fund (ZCPB) and BMO Global Strategic Bond Fund (ZGSB). Clare O’Hara reports.

Hedge-fund ETFs put sophisticated strategies in reach

Hedge funds are the playground of well-heeled and institutional investors. But lower-fee exchange-traded funds (ETFs) offer similar strategies. While earning hedge fund-like returns in an ETF wrapper may be an enticing way to reduce risk or court strong performance, retail investors need to do their homework because these offerings differ vastly and can have limitations. Shirley Won reports.

At long last, there are decent returns in just sitting in cash

Cash has long been laughed at for its pathetic returns, but at last it may be on the verge of winning some respect among investors. Yields on short-term fixed-income investments, which resemble cash because they lock up your money for no more than a few months, are on the rise and challenging aspects of the equity market. The yield on the three-month U.S. Treasury bill is now about 1.9 per cent, after rising above the dividend yield on the S&P 500 late last week for the first time in about a decade. David Berman reports (for subscribers).

Top Links (for subscribers)

BMO: ’Don’t look for a quick turn in the housing market anytime soon’

30 stocks to weather a global profit slowdown

Others (for subscribers)

Thursday’s analyst upgrades and downgrades

Thursday’s small-cap stocks to watch

Wednesday’s analyst upgrades and downgrades

Wednesday’s small-cap stocks to watch

Others (for everyone)

Long end of Canadian yield curve inverts for first time since 2007

Millennial electrician earning $80,000 invests in bitcoin and real estate

Einhorn is having a hedge-fund midlife crisis as losses mount

$300-billion in profits and U.S. stocks still can’t shake bonds’ yoke

A warning signal for global stock markets is flashing in Japan

Oil hits new multi-year high above $80 on Iran concerns

Pope calls derivatives market ‘a ticking time bomb’

The U.S. stock market’s lifeboat may be sinking

Jack Dorsey is all in on bitcoin as currency of the future

Investors cut Apple holdings by most since at least 2008

Berkshire doubles Teva stake, adds to Apple, ends a newspaper bet

The $1,300 U.S. rental home is so hot Canadians are bidding for it

What does $3-billion even buy Tesla these days?

Bunkers for the wealthy are said to hoard $10-billion of bitcoin

Number Crunchers (for subscribers)

Gaming stocks that could hit the jackpot from U.S. ruling on sports betting

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What’s up in the days ahead

Rob Carrick this Saturday looks at what longer life expectancy for women means for their retirement savings.

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Compiled by Gillian Livingston

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