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Goldman Sachs chief U.S. equity strategist David Kostin uncovered an important change in market performance in 2023, one that will have investors focusing on individual company news rather than macroeconomic factors.

In his most recent Weekly kickstart report, Mr. Kostin noted that in 2022, macroeconomic factors like money supply growth, interest rates and gross domestic product growth explained 69 per cent of equity returns. For example, rising rates hurt auto manufacturers (the worst performing S&P 500 sector), tightening money supply hit U.S. bank stocks, and oil companies benefited from strong nominal GDP growth.

In 2023, this trend has reversed with individual company news driving 71 per cent of market returns. The clearest sign of this is that correlations have dropped significantly – stock price movements are widely dispersed.

Theoretically, equity dispersion means more opportunity for active fund managers to outperform the index. Historically, they haven’t on average and this pattern continued this year. Only 21 per cent of large cap U.S. equity fund managers have outperformed the benchmark and this is below the long-term average of 33 per cent.

The strategist argues that in the current environment, “the best stock picking opportunities arise in sectors where returns are driven by micro factors and where the typical firm in the sector carries a high level of firm-specific risk.”

Mr. Kostin cited the communications services and consumer discretionary sectors as good places to look for opportunities. He also included a list of stocks across a number of industries that fit the bill. The names on the list most likely to appeal to Canadian investors include Moderna Inc., Netflix Inc., Norwegian Cruise Lines Holdings, Paramount Global, Bath & Body Works and Tesla Inc.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

TC Energy Corp. (TRP-T) The stock has fallen on tough times, to be sure. But our dividend growth investor John Heinzl has no plans to sell shares either personally or in his model Yield Hog Dividend Growth Portfolio. He provides three reasons why he’s hanging on.

The Rundown

How to live with stock market uncertainty

Global stocks have defied expectations this year, roaring higher despite a massive surge in interest rates and widespread predictions of an imminent recession. Yet the big gains also seem surprisingly fragile. They have been driven, in large part, by huge advances in a handful of big U.S. tech companies that are expected to benefit from AI. Outside that charmed circle, earnings growth is fading, although optimism is growing about the possibility of a soft landing for the economy. Depending on how you squint, you can see just about any message you want to in this muddle of conflicting signals. Ian McGugan has some thoughts on the best moves an investor can make right now.

Also see:

Options bets on earnings-fueled volatility in U.S. stocks paying off

Inflation report, bond yields in focus as U.S. stock rally pauses

Like stable dividends? Check out this portfolio

The idea of earning dividends while relaxing on the beach prompted Norman Rothery to return to the Stable Dividend portfolio, which has generated market-beating returns by investing in low-volatility dividend stocks. Even better, its strong results persist even when using different measurements of volatility. (And for updates on all of Norman’s dividend and value investing portfolios, click here.)

It’s time for investors to revisit their asset mix

The gap between the 12-month forward earnings yield on the S&P 500 and the 10-year U.S. Treasury note has plunged all the way to below 100 basis points as of the start of this week. That’s a two-decade low, and the implications are enormous for how investors should allocate their portfolios, say David Rosenberg and Bhawana Chhabra.

Also see: Rising bond yields emerge as pressure point for U.S. stock rally

Bond traders prepare to brave ‘painful’ yield curve bets as rate hikes slow

Bond traders are eyeing a return to a type of trade that left them battered earlier this year - betting on yield curves returning to a more normal shape as slowing economies force central banks to cut interest rates, reports Harry Robertson of Reuters.

Also see: Catastrophe bond funds rank among 2023′s top performers

Fed decoupling boosts emerging market stocks, cools currencies

Investors are eyeing gains in emerging markets stocks and a cooling of their currencies amid an unprecedented global decoupling in the direction of interest rates. While the U.S. Federal Reserve has delivered aggressive interest rate hikes since March 2022, major emerging market countries like Brazil, Chile and Hungary have kickstarted rate cutting cycles to spur their economies. Inflation is coming down rapidly in many developing nations who are unwilling to wait until the Fed - or the European Central Bank or Bank of England - are done with tightening. But this time round the breadth of the easing push has never been seen before, as Karin Strohecker and Jorgelina Do Rosario of Reuters report.

Stop your active portfolio manager bashing. Skill does still matter

Are markets efficient? Can active investors consistently find stocks where value and price differ? Proponents of market efficiency believe that any outperformance by active managers comes purely from luck. They recommend that the investor hold the market portfolio, instead of actively seeking undervalued stocks. But evidence shows that seeking undervalued stocks works, says value investor professor Dr. George Athanassakos.

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Tuesday’s Insider Report: Multiple executives are buyers of this energy stock yielding 7.7%

Number Cruncher: 10 investment funds similar to Canada’s largest ETF

Number Cruncher: A summer shopping list for North American distribution and retail stocks

Ask Globe Investor

Question: Can you recommend an emerging market ETF that is not so heavily weighted to China? I’m looking for one with more exposure to India, and less to China. Or is there a specific India ETF I should consider? Thank you. – Peter D.

Answer: The BMO MSCI India ESG Leaders Index ETF (ZID-T) is one I’ve recommended since 2017 and has performed well. There’s been a capital gain of almost 80 per cent to date plus distributions. I continue to rate it a Buy.

If you want a fund with more geographic scope, look at the iShares MSCI Emerging Markets ex China ETF (EMXC-Q), which trades on Nasdaq. It has performed well recently, up 10.6 per cent year-to-date.

The fund was launched in 2017 and has been quite volatile, with double-digit losses in 2018 and 2022 but decent gains in the other years. The five-year average annual compound rate of return to July 31 was 3.7 per cent.

Taiwan is the largest geographic holding in the portfolio, at 21.5 per cent of total assets. It’s followed by India (20.6 per cent), South Korea (17.8 per cent), and Brazil (7.9 per cent). Information technology is the largest sector (almost 26.7 per cent), followed by financials (24.6 per cent).

The MER is a reasonable 0.25 per cent. The fund has US$4.8-billion in assets under management.

--Gordon Pape

What’s up in the days ahead

Algonquin Power will release its quarterly results Thursday morning, along with an announcement on whether to proceed with selling its renewable energy assets. David Berman will be following developments.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

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Compiled by Globe Investor Staff

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