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The S&P/TSX Energy Index returned 28.8 per cent in the first quarter and 60 per cent over the past 12 months, easily breezing past the broader benchmark’s gains of 3.8 per cent and 20.3 per cent, respectively. The research team at RBC Capital Markets, however, believes this period of outperformance is drawing to a close.

The strategists at RBC survey the firm’s analysts at the end of each quarter in an attempt to gauge each market sector’s valuations, fundamentals, profit margins, pricing power and demand. The big surprise this quarter is that, despite attractive valuations, the team is downgrading the energy sector from overweight to market weight in the wake of the survey results.

Flagging global economic growth and central bank monetary policy are the key factors behind the downgrade. RBC’s U.S. economists recently cut their 2022 U.S. GDP forecast to 2.5 per cent, roughly in line with the 50-year average. The average economist estimate for U.S. growth in 2023 is also on the decline, moving from 2.5 per cent to 2.3 per cent.

The team expects slowing growth, in combination with current high prices, to limit energy demand through the remainder of the year.

Tightening monetary policy, a global trend that includes the Bank of Canada, is another limiting factor for energy stocks. The energy sector is included among value stocks and RBC found that value investing strategies historically outperform ahead of interest rate hikes, but not afterward.

Rising interest rates cause equity investors to price in a slowing growth environment under normal conditions. The number of companies capable of high earnings growth declines, and investment assets gravitate toward these rarer opportunities where profits continue to grow as economic expansion slows. Value stocks get left behind.

The outlook is far from dire for Canadian energy stocks. RBC’s analysts see it as the most attractive sector based on fundamentals, valuations are rated in the mid-range between neutral and attractive, and profit margins are expected to continue expanding. Analyst Greg Pardy has outperform ratings on Canadian Natural Resources Ltd., Ovintiv Inc., Imperial Oil Ltd., MEG Energy Corp., Enerplus Corp., and Cenovus Energy Inc.

At the same time, investors in the energy sector have made a bunch of money in a short period of time and RBC’s strategists make a compelling argument that taking some profits is a prudent course.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Rob Carrick’s 2022 ETF Buyer’s Guide: Best international & global equity funds

While returns from the Canadian and U.S. stock markets were exceptional over the past 12 months, the international equity funds in the 2022 Globe and Mail ETF Buyer’s Guide produced an average gain of a bit under 2 per cent. But not all international and global ETFs are built the same, and there are differences in costs and portfolio construction that investors should pay attention to. Rob Carrick reviews some of the best options in the marketplace.

Does your portfolio include this disappointing inflation-righter?

Canadian real return bonds have been really horrible lately. The concept behind real return bonds is that their face value and semi-annual interest payments are inflation-adjusted. Inflation is soaring right now, so what gives? Rob Carrick explains, and provides some alternative ideas.

Retail traders splurge on risky plays, fuelling bounce

Freshly emboldened retail investors have continued piling into risky assets, supporting a bounce that has buoyed everything from meme stocks to cryptocurrencies despite economic worries and geopolitical uncertainty. That’s been especially the case for GameStop shares this week, after the video game retailer at the heart of last year’s retail trading frenzy said it would seek shareholder approval for a stock split.

‘Robust’ corporate cash may buoy stocks after rocky quarter

As the U.S. stock market starts a new quarter, investors are looking at what could support equities in the coming months - with high cash levels at companies one potential boost as executives deploy resources for share buybacks, dividends or deals.

U.S. stocks, bonds flash diverging signals as volatile first quarter ends

Which market has it right? With the first quarter of 2022 over, the U.S. stock and bond markets appear to be conveying drastically different assessments of the growth outlook, leaving investors to decide which view will prevail.

Also see:

The 60/40 balanced portfolio of stocks and bonds escapes first quarter relatively unscathed

U.S. recession unlikely despite bond market alarm: PIMCO, Amundi

As good as gold? Bullion funds grapple with ethical investing

Want to invest in ethical gold? It’s harder than it looks. A push by investment funds to avoid bullion from unethical sources by buying newly made bars is limited in its impact because many still contain old gold whose provenance is unknown, bankers and refiners say. That means very few investment funds know the origin of their product and its environmental and humanitarian record, denting ambitions to tap into the booming market for sustainable investments.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

John Heinzl’s model dividend growth portfolio as of March 31, 2022

Number Cruncher: These 18 TSX-listed stocks appear overleveraged and overvalued

Number Cruncher: Seven Canadian life insurers set to gain with rising interest rates

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Friday’s Insider Report: Chairman cashes out $10-million from this high-yielding stock

Thursday’s Insider Report: Executive invests just under $500,000 in this beaten-down growth stock

Scott Barlow’s Top Links: BofA’s top 10 U.S. investment ideas for the second quarter

J.P. Morgan drops Apple, Qualcomm from top picks as tech demand slows

Globe Advisor

Canadian arbitrage funds benefit from strong M&A and SPAC tailwinds

Funds drive surge in end-of-quarter rallies, research suggests

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Ask Globe Investor

Question: I’m concerned about the financial state of NFI Group Inc. (NFI-T). Is there a chance the company could declare bankruptcy? – Claude V.

Answer: Bankruptcy isn’t likely, but the company is in some financial difficulty. In the fourth quarter and year-end report released March 10, management said that lower trailing adjusted EBITDA combined with the company’s anticipated debt profile will affect its “ability to comply with certain financial covenants under its senior credit facilities.” This includes the interest coverage ratio in the near term and the total leverage covenant beginning in the second half of 2022.

The company said in a statement it is “in detailed discussions with its banking partners to obtain further covenant relief extending into the first half of 2023.″It added that management believes that “with the anticipated covenant relief, the company’s cash position and capacity under its existing credit facilities, combined with anticipated future cash flows and access to capital markets, will be sufficient to fund operations, meet financial obligations as they come due and provide the funds necessary for capital expenditures, dividend payments, and other operational needs.”

The bottom line is that management is hoping that banks will bail them out from a financial squeeze. That will probably happen, but this is not a situation any company, or its lenders, wants to contend with.

--Gordon Pape

What’s up in the days ahead

Is a U.S. recession now inevitable? Ian McGugan will share his perspective. And David Berman does a deep dive into the investment case for Kinross Gold.

Q2 to test resilient stocks, peak inflation: World market themes for the week ahead

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

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Compiled by Globe Investor Staff