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RBC Capital Markets head of U.S. equity strategy Lori Calvasina’s list of Top 10 Things We’re Thinking About in US Equities Heading Into 2024 begins with her quantitatively driven year-end target of 5000 for the S&P 500, implying an approximately 10 per cent return from current levels.

For thought number two, the strategist noted that a contrarian view of the weekly AAII investor sentiment survey - being bullish when the survey tilted bearish - was among the most successful investing strategies in 2023. The survey is currently in a pessimistic range that is typically followed by an average 10.1 per cent gain in the S&P 500 in the next 12 months.

Thought three is a reminder that valuation levels, currently high relative to history, can remain elevated longer than many bears believe. RBC believes that waning inflation pressure will help maintain price to earnings ratios close to present levels.

Ms. Calvasina’s fourth thought is that while 2024 profit growth forecasts are supportive of higher stock prices, a lot of the expected earnings recovery is already reflected in the market. This will limit upside from here. Similarly, attractive yields on bonds will divert assets from equities and also limit S&P 500 upside, and this is thought number five. But the strategist reminded investors of the 1990s when earnings yields and bond yields were similar and equities still performed well.

Thought number six is that the 2024 U.S. presidential election will be a source of market volatility – election years have historically generated subpar returns. Thought seven, also somewhat self-explanatory, is that low U.S. GDP estimates are the biggest headwind to equity performance in 2024. Growth is expected to fall from 2.3 per cent this year to 1.0 per cent next year.

Number eight is that markets of the past two years have resembled two past eras - the recovery after the post-tech bubble implosion in 2002-2003 and also the post-Global Financial Crisis period of 2010-2011. These times were characterized by “fragile investor sentiment, constant fear of tipping back into another economic downturn, aftershocks from the prior crisis, and, in the case of 2002-2003, heightened geopolitical angst.” Ms. Calvasina believes we are in a new post-pandemic era of investing, and one in which the new rules are still being written.

Thought number nine is the expectation that the ongoing war between growth and value investing strategies will continue. Growth stocks are a crowded trade, according to RBC, but they also tend to outperform during periods of a slow economy.

The final RBC thought for 2024 is that U.S. small caps are beginning to look interesting. Ms. Calvasina estimates that the small cap sector is currently oversold and valuation levels are trending towards the low end of their historic range. In addition, small cap stocks tend to outperform when the Federal Reserve begins to cut rates, an event that is expected next year.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Element Fleet Management Corp. (EFN-T) Toronto-based Element Fleet Management is a leading fleet management company with operations in North America, Mexico, Australia and New Zealand. The stock is closing in on an all-time high and earlier this month the company announced a dividend hike. As Jennifer Dowty tells us in reviewing the investment case, seven of eight analysts still have buy ratings.

VitalHub Corp. (VHI-T) Toronto-based VitalHub provides healthcare information systems. Over the past 10 trading sessions, the share price has rallied 28 per cent on high volume. As a result, the stock is now in deeply overbought territory. But as Jennifer Dowty tells us, there are several reasons why investors willing to take on risk may want to follow the stock, including seasoned leadership, organic and acquisition growth, rising margins and a healthy balance sheet.

The Rundown

Big investors say U.S. markets rally could prove short-lived

The recent rally that has lifted U.S. stocks and bonds is more of a year-end rebound than a turning point, according to big money managers, who see fiscal and monetary policies, next year’s presidential election and recession fears as likely to start weighing on markets.

Also see:

Analysts clip Toronto market forecasts, favour value stocks: Poll

S&P 500 to see small gain in 2024 as U.S. economic risks rise: Poll

Global stock indexes forecast to rise modestly in 2024

‘Net-net’ stocks soared in 2023. What is on the list for 2024?

At this time of year, many investors review their portfolios for tax loss sale candidates. From time to time, the combination of motivated vendors and a looming year-end deadline will generate attractive buying opportunities for intrepid value investors. So how can we identify these deep value bargains? In Robert Tattersall’s view, the iconic Ben Graham’s “net-net” working capital per share screen is a great starting place. Mr. Graham, the dean of value investing, saw this as a measure of stocks trading below liquidation value per share. For the 10 names that made a curated list last year, the average gain was an impressive 39 per cent. Here are the names on the list to buy now for hopefully big gains in the new year.

Japan’s inflation comeback prompts investors to tear up old playbooks

Global inflationary forces are finally seeping into Japan’s economy after decades of falling prices, forcing investors to radically rethink their Japan bets as the Bank of Japan considers a major policy shift.

Tema ETFs hops on weight-loss drug frenzy with its new cardiovascular fund

Tema ETFs has launched a new exchange traded fund, the Tema Cardiovascular & Metabolic ETF (HRTS-Q), that tracks popular drugmakers like Novo Nordisk and Eli Lilly, aiming to tap into growing demand for their weight-loss and diabetes drugs.

‘Magnificent 7′ bets drive hedge fund crowding to record high

Hedge fund crowding has hit its highest on record, as asset managers have upped their bets on the “Magnificent 7″ tech stocks that have juiced up portfolio returns this year, Goldman Sachs said in a report on Tuesday.

Others (for subscribers)

How markets and economists are reacting to Canada’s latest inflation data

Despite tough times, it’s been a good year for those who use robo-advisers

Number Cruncher: 11 funds that are paying out more than mortgage rates

Number Cruncher: 15 overlooked U.S. mid-caps excelling in free cash flow generation

Wednesday’s Insider Report: CEO and CFO accumulate this beaten-down lumber stock

Tuesday’s Insider Report: CEO invests $900,000 in this financial stock

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Monica Rizk: Bullish on Empire Co.

Globe Advisor

Geopolitical tensions, seasonal buying push gold demand higher – but is now the right time to invest?

Six stocks to benefit from the aging baby boomer trend

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Ask Globe Investor

Question: Shares of Brookfield Infrastructure Partners LP (BIP-UN-T) have fallen like a stone. Is John Heinzl planning to hold on to his units, or would he consider selling and putting the money into something more promising?

Answer: I’ve held Brookfield Infrastructure for many years, and it’s rewarded me with growing distributions and, until recently, a rising stock price. As a long-term investor, the last thing I would do is sell a good company just because its share price has suffered a setback. In fact, if it wasn’t already one of my largest holdings – both personally and in my model Yield Hog Dividend Growth Portfolio – I would even consider adding to my position to take advantage of the lower market price.

That’s not to say I’ve enjoyed watching the shares tumble. In the past six months, units of the limited partnership – whose global infrastructure portfolio includes utilities, communications towers, railroads, toll roads and data centres – have skidded about 24 per cent, excluding distributions. Shares of sister company Brookfield Infrastructure Corp. (BIPC), have fared even worse, dropping about 30 per cent.

As unpleasant as that’s been, there’s nothing inherently wrong with Brookfield Infrastructure’s businesses. The chief problem is rising interest rates. In addition to making it more expensive for companies to run their operations and finance acquisitions, higher rates put downward pressure on stock market valuations. This is especially true for companies such as Brookfield Infrastructure that pay dividends and must compete with the rising yields offered by bonds and guaranteed investment certificates. For the yields on dividend stocks to rise, their share prices – which move in the opposite direction – must fall.

Investors are also worried that higher interest rates will compress the valuations of businesses that Brookfield Infrastructure plans to sell as part of its capital recycling program. The company is aiming to divest about US$2-billion of assets in 2024, with plans to redeploy the cash into higher-return opportunities.

If there’s a silver lining in all of this, it’s that high interest rates should make more acquisitions available to Brookfield Infrastructure at attractive valuations. So, while high rates may hurt the company as a seller, they help it as a buyer.

“Capital recycling is all about the spread in returns, not the absolute level of valuations/returns,” Robert Kwan, an analyst with RBC Dominion Securities, said in a note this week after meetings with Brookfield Infrastructure’s senior management team.

Brookfield Infrastructure actually sounds rather cheerful.

“The market backdrop has created a strong environment for capital deployment, with returns on new investments expected to be well in excess of our 12- to 15-per-cent target,” the company said when it released third-quarter results on Nov. 1.

“Our 2023 deployment is expected to provide us with some of the best risk-adjusted returns we have seen in the last decade,” it added.

Recent deals included the acquisition of Triton International Ltd., the world’s largest lessor of intermodal shipping containers, and the pending purchase of a portfolio of data centres out of bankruptcy from Cyxtera Technologies Inc.

In a recent note, analyst Frederic Bastien of Raymond James cited several factors that give Brookfield Infrastructure an advantage in the current high-rate, high-inflation environment. These include built-in inflation escalators in many of its businesses; strong capital deployment that has paved the way for growth in future years; and a balance sheet in which roughly 90 per cent of its debt is locked in at fixed rates, with an average maturity of seven years.

“Lastly, management is backing its strong conviction in the value of the business with share buybacks,” Mr. Bastien said.

If Brookfield Infrastructure is buying its shares, I’m not selling mine.

Finally, in recent weeks, sentiment appears to have shifted in Brookfield Infrastructure’s favour. With inflation moderating and interest rates having possibly peaked, BIP.UN has gained about 20 per cent in November, while BIPC is up about 22 per cent. Both are still well below their previous highs, but with BIP.UN and BIPC yielding about 5.6 per cent and 4.8 per cent, respectively – and a distribution hike expected in the new year – investors are being paid to wait.

--John Heinzl (E-mail your questions to

What’s up in the days ahead

Former fund manager Tom Czitron has some specific recommendations on preferred shares to be buying right now.

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

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Compiled by Globe Investor Staff

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