I made an RRSP contribution on Monday, but none of the money will be placed in equities until there’s more assurance that stock prices are low enough to reflect the rising risks of substantial loss of capital.
The most immediate concern is that U.S. corporate profit guidance has been slashed to the point where the next earnings season is expected to show the first annual decline in profits in three years. I’m not convinced that, at this late stage of the market cycle, investors will take that well.
Hopes remain for recovery in earnings growth for the second half of 2019. But Morgan Stanley equity strategist Michael Wilson notes that stock prices have not adjusted down to account for reductions in profit expectations, noting the deterioration in earnings growth expectations over the past few months. According to the latest analyst forecasts, first-quarter earnings are expected to contract 1.7 per cent.
“Strangely, I see much less acknowledgement of this growth deterioration with everyone so focused on [central bank monetary policy] and stock price trends,” Mr. Wilson said in a research report this week. "A big part of our equity strategy discipline is listening to what the market is telling us, and we acknowledge that the recent surge in price and breadth is a positive signal about the future. However, earnings revisions have been some of the worst we’ve ever observed in terms of breadth and velocity. Virtually every sector and region of the world is seeing downward revisions, making it difficult to explain them away as a temporary function of trade tensions and/or the government shutdown in the U.S.”
Mr. Wilson’s U.K. Britain-based colleague Andrew Sheets, in a separate research report, added that “against renewed optimism there is real fundamental weakness, both in growth and earnings trends.”
The pessimism is not limited to Morgan Stanley. Credit Suisse’s prominent strategist Andrew Garthwaite published a report this week warning investors that corporate debt is approaching dangerous levels and that this has yet to factor into stock prices. Nomura issued a report predicting lacklustre retail sales growth in China this year after weak consumption during the 2019 Lunar New Year holidays that just wrapped up.
A slower Chinese economy is not a good sign for Canadian investors – particularly those with resource-related investments – as the domestic earnings season heats up. Only 47 of 239 S&P/TSX Composite members have reported fourth quarter earnings, but so far, the results have been uninspiring. Profits have come in 1.7 per cent below expectations and sales growth is running a meagre 0.75 per cent ahead of forecasts.
The global market rally that began on March 9, 2009, turns 10 years old in less than a month. Bay Street and Wall Street experts are fond of telling us that bull markets don’t die of old age. But the bulk of the rally’s gains are almost certainly behind us. For investors with a three-year time horizon, the surety of fixed-income returns seems, for now, a more attractive option than trying to squeeze the last drop of returns from increasingly volatile markets.
I’m pretty bearish at the moment, but I hold all market-related opinions loosely – they could change at any time. A resolution of the U.S.-China trade dispute would be a reason to lean back bullish, and perhaps more important, signs that economic stimulus in China was starting to work would alleviate a lot of fears about deteriorating global economic growth.
For now, however, I’m happy to wait and watch.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Canadian Tire Co. Ltd. (CTC-A-T). On the day Canadian Tire Co. Ltd. released third-quarter results in November, investors rewarded the one-two punch of earnings expectations being exceeded and a dividend hike by sending the shares up 12.5 per cent at one point. But in the days that followed, the stock gave back those gains. That suggested there was more to the numbers than meets the eye. Now, as Canadian Tire prepares to release its full-year numbers Thursday, we have a possible explanation, courtesy of the analysts at Veritas Investment Research. Veritas, like many, is concerned about Canadian Tire’s online competitiveness. The truly original insight behind its “sell” rating, however, is how Veritas has flagged the number of earnings-boosting accounting decisions Canadian Tire has made in the last year. David Milstead reports (for subscribers).
ECN Capital Corp. (ECN-T). This stock appears on the positive breakouts list (stocks with positive price momentum). This small-cap stock is well covered by the Street with 11 analysts issuing recent research reports on the company, of which 10 analysts have buy recommendations. Analysts are forecasting strong earnings growth for the company in 2019 and 2020. The consensus target price implies a potential 18 per cent total return (including the 1 per cent dividend yield) over the next year. Toronto-based ECN Capital is a business services provider serving more than 90 U.S. banks and credit unions by originating, managing and advising on prime consumer credit portfolios (loan portfolios and credit card portfolio) through its three core operating segments. Jennifer Dowty reports (for subscribers).
TD Asset Management’s CEO has never seen sentiment towards Canada this negative. Here’s where he’s seeing investment opportunities
Just weeks into the new year, North American equity markets are off to a strong start. In Canada, the S&P/TSX Composite Index has rallied more than 1,200 points or nearly 9 per cent. Out of the 29 trading sessions year-to-date, the S&P/TSX has closed higher 22 of these days. Will the positive stock-market momentum continue? Bruce Cooper, chief executive and chief investment officer of TD Asset Management, shared his 2019 market outlook in a recent conversation with The Globe and Mail. Jennifer Dowty reports (for subscribers).
Here’s proof that you’re wasting your time trying to time the market
Trying to time the market might be tempting but it’s failure-prone. Most investors should focus on the fundamentals instead. A perfect timing method was recently investigated by Andrew (Drew) Dickson, the founder of London-based Albert Bridge Capital. He compared the results of two different U.S. investors. Both put $1,000 a year into the S&P 500 index for 30 years before they retired at the end of 2018. One was lucky and invested at the low of the year, while the other was unlucky and invested at the high of each year. The difference? Not as much as you think. Norman Rothery reports (for subscribers).
Analysts just downgraded Enbridge and several utility stocks. Here’s why you shouldn’t act on it
Remember those days when economic forecasts were upbeat and interest rates were rising? Well, they’re over – and the shift to a more subdued outlook has given rate-sensitive Canadian utilities a big lift over the past six weeks. The sector has rallied 13.7 per cent from its Dec. 24 lows, which is impressive for a collection of companies known for dividends and steady financial results, rather than spectacular growth and innovation. But how much upside is left? This question gained some urgency on Friday after a couple of analysts downgraded several utilities in response to the recent run-up in stock prices. However, here’s another way to approach utilities: The rebound has further to run as the market continues to adjust to the idea that interest rates may have peaked. David Berman reports (for subscribers).
The top 10 Canadian equity analysts of 2018 – and their most profitable picks
There are thousands of sell-side analysts publishing piles of stock recommendations every day. But not all these analysts are worth following. The key question is: how do you know who to trust? TipRanks is a website that tracks and ranks analyst recommendations. It helps investors follow the recommendations of best-performing analysts with a proven track record of success. Using this data, TipRanks has now published a list of Canada-focused stock pickers who had the most success last year. TipRanks lists the Top 10 Canadian analysts in 2018, and their most profitable stock pick. Harriet Lefton explains.
Cashless society series:
How a society going cashless will give central bankers a potent new weapon
The move to a cashless society is about much more than just consumer convenience. As nice as it is to be able to buy a coffee without fumbling for change, the economic transformation from ditching paper money has the potential to reach far deeper than that. Picture a world where you might have to pay banks to hold your money. Where regulators could at times make it punitively expensive to save. Mind you, this would also be a world where recessions would be rare and brief, where inflation would be non-existent. At least, so goes the theory. It rests on the new powers that central bank policy-makers would be able to wield in a society dominated by electronic, rather than paper, money. Ian McGugan reports (for subscribers).
A feature from the weekend:
Others (for subscribers)
Others (for everyone)
Ask Globe Investor
Question: Do you think that the current controversy with Huawei will have any effect on the dividends paid by BCE Inc. (BCE) and Telus Corp. (T)?
Answer: No. Both companies could face short-term disruptions if the federal government decides for security reasons to ban China’s Huawei Technologies from supplying equipment for fifth-generation (5G) wireless networks in Canada. But your BCE and Telus dividends are not in any danger.
On BCE’s fourth-quarter conference call this week, chief executive George Cope said the company does not anticipate any significant capital spending or timing repercussions if – as seems increasingly likely – Huawei is blocked from participating in 5G.
BCE has not yet chosen a 5G supplier, Mr. Cope said. “And if there was a ban or we chose a different supplier than Huawei for 5G, we’re quite comfortable all those developments would be addressed within our traditional capital intensity envelope and therefore [we see] no impact from a capital expenditure program outlook.”
In a note to clients, analyst Maher Yaghi of Desjardins Securities said that “this assurance from management should soothe investors who have become more anxious about this topic.”
In another sign of confidence, BCE raised its dividend by 5 per cent when it announced results this week, signalling that the company sees no material risks to its financial outlook.
“Management continues to have strong controls in place to deliver on the company’s stated 5-per-cent [annual] dividend growth model,” Mr. Yaghi said.
Both BCE and Telus use Huawei equipment in their existing 3G and 4G networks, but the potential security vulnerabilities are greater with 5G and “nobody expects Huawei equipment to be banned from existing networks in Canada,” National Bank Financial analyst Adam Shine said in a note.
“As such, a more significant and costly rip-and-replace effort is not anticipated to befall Bell and Telus,” Mr. Shine said. Banning Huawei from 5G would increase costs because the carriers would have to choose more expensive suppliers and might have to replace some of their recent spending, but the potential impact is “truly hard to quantify,” he said.
Telus is scheduled to release fourth-quarter results on Feb. 14, when it is expected to comment on the potential impact of a Huawei 5G ban.
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Compiled by Gillian Livingston