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BofA Securities’ popular monthly report detailing the results of a monthly survey of portfolio managers provided some fascinating observations, most of which support forecasts for a continued major sector rotation in equity markets.

The most jarring finding was that money managers had slashed their technology holdings to a degree not seen in 15 years. Month over month, the surveyed managers had, on average, cut their exposure to technology in March by almost 24 percentage points (chart posted on social media here).

Insurance, banks and energy stocks were the beneficiaries of the exodus from the technology sector, adding 13, 11 and nine percentage points, respectively. The B of A research team used the word ‘capitulation’ to describe the rotation from the market’s past winner, technology, to economically sensitive sectors that will outperform if the post-pandemic recovery continues.

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In a separate report, the firm’s U.S. quantitative strategist Jill Carey Hall argued that these trends have a long runway. In Recovery, reflation, re-rating – stocks to buy for the 3 R’s, the strategist cited analysis concluding that the U.S. market had entered a mid-cycle phase that favoured economically sensitive small cap, resource and value stocks over large-cap growth companies.

Importantly, Ms. Carey Hall believes that a recovery in resource-related profits is not yet reflected in stock prices. “Inflation-sensitive sectors such as energy and materials are still trading at big discounts to history”, she writes. Similarly, U.S. small-cap stocks are also undervalued, trading at a 10 per cent discount on forward price-to-earnings multiples, when a small premium is the historical average.

BofA presented a thankfully succinct list of 17 stocks it believes are perfectly suited to their outlook. These are, in no particular order, Comcast Corp., Walt Disney Co., Marriott International Inc., Hess Corp., World Fuel Services Corp., Occidental Petroleum Corp., Principal Financial Group Inc., CNH Industrial NV, Emerson Electric Co., Herc Holdings Inc., Knight-Swift Transportation Holdings Inc., Parker-Hannifin Corp., Robert Half International Inc., Union Pacific Corp., Broadcom Inc., Alcoa Corp. and Axalta Coating Systems Ltd.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

CanWel Building Materials Group Ltd. (CWX-T) This Canadian lumber stock is trading at a 10-year high on the back of a strong earnings report last week, driven by the hot housing market and an ongoing home-renovation boom amid the pandemic. The company, which offers an attractive dividend yield of 5.6 per cent, also announced a one-time special dividend last week. As Brenda Bouw reports, some analysts are increasing their price targets, expecting even further gains.

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The Rundown

A millennial investor wonders if his buy-and-hold approach is too simplistic

Returns from balanced portfolios have been strong in the past year. But even returns like the typical 13 per cent can seem a disappointment when you look at the fat double-digit returns from speculative small-capitalization stocks and shares of companies in hot sectors like technology. And so, a 29-year-old reader asks Rob Carrick for some feedback on his old-school way of investing.

Oil bears and bulls grapple as market puzzles over pandemic exit

Trading in oil futures is now as heavy as it was in the first months of the COVID-19 crisis, according to market data and analysts, with oil bulls and bears rushing to hedge against jolts in the steady rise of prices. Noah Browning of Reuters reports.

Exchange-traded funds

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Value stocks are rebounding. Here are the best Canadian ETFs to invest in them

Gordon Pape compares the exchange-traded funds that may continue to benefit from the rotation into value investing - and provides his top pick.

Why investors should tread carefully when buying thematic ETFs

Booming demand for thematic exchange-traded funds, evidenced by massive flows in 2020 that have continued into this year, is raising concerns about their impact on values and liquidity in the market. As more retail investors look for gains in funds that cover themes from e-commerce and clean energy to cloud computing and cannabis, analysts say the influence of these ETFs on the micro- and small-cap categories they’re invested in is cause for caution.

ETFs to help you rid fossil fuels from your portfolio

Investors seeking to remove fossil fuel producers from their portfolios have a small but growing number of North American-listed exchange-traded funds to choose from. Joel Schlesinger has a sampling of ETFs offering exposure to broad major indices largely without oil, gas and coal producers.

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Also see: Three ETFs to play the resurgence in copper prices

Others (for everyone)

Wednesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: Bank executives take profits off the table

Number Cruncher: Fourteen TSX dividend growth stocks for conservative income investors

Number Cruncher: Twenty stocks that outperform

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U.S. debt binge makes bonds a poor investment: Dalio

Ask Globe Investor

Question: I have been holding a high-yielding mutual fund in my non-registered account for more than 10 years. Approximately 80 per cent of the monthly distribution is return of capital. I have been reducing my adjusted cost base every year when I receive my T3. Eventually the ACB will reach zero. What will happen then? How will I report this on my tax return?

Answer: Unlike a reinvested distribution, which increases the investor’s ACB, a return of capital reduces the ACB. When the ACB reaches zero, any amount of ROC beyond that is treated as a capital gain for tax purposes.

For example, say your total ACB is $100 and you receive a ROC distribution of $150. To report this on your tax return, you would enter negative $50 for the “adjusted cost base” and zero for “proceeds of disposition.” The difference – zero minus negative $50 (which is the same as zero plus $50 because you’re subtracting a negative number) – equals your capital gain of $50. The ACB then resets to zero.

--John Heinzl

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What’s up in the days ahead

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

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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