BofA Securities commodity strategist Michael Widmer has noted a change in tone in resource sectors towards a less investor-friendly environment, and this includes potential market pitfalls surrounding iron ore and copper miners.
“The current environment reminds us in many ways of a classical bull market pivot,” Mr. Widmer wrote. “Prices rally, even though risks have been building, a combination that puts further [commodity price] upside at risk.”
Slowing post-pandemic global growth and efforts by Chinese officials to re-organize the commodity-heavy segments of their economy (described as ‘heavy handed’ by BofA) are the primary reasons for concern for investors in resource sectors.
In China, August steel production was reported 16 per cent below May levels as regulators rigidly enforced emissions guidelines. This is the main reason Mr. Widmer slashed his forecast for 2022 global iron ore prices by 45 per cent, to about 10 per cent below current levels.
The Chinese government is also attempting to reign in mortgage lending, as the Evergrande crisis clearly shows. Property construction is responsible for 53 per cent of Chinese steel demand and 51 per cent of zinc demand, so total demand for these commodities is now less assured.
Mr. Widmer reduced his 2022 target price for copper by 21 per cent (to US$4.47 per pound, marginally above current levels) in the belief that global economic growth has already peaked in year over year terms. He notes that the copper price is already trading slightly above where global manufacturing indicates it should be.
There remains pockets of commodity markets with far more bullish outlooks. The growth of electric vehicle sales has created a supply deficit for nickel and BofA has increased its 2022 price target by 45 per cent as a result.
The forecast for aluminum is also promising. China is increasingly suffering electricity shortages that have limited aluminum production and global supply should remain tight, supporting the commodity price.
We appear to have reached the point where the rising tide of worldwide growth will no longer lift all commodity boats, at least according to Mr. Widmer. Investors in resource sectors should be more selective in terms of which specific commodity drives their portfolio returns.
-- Scott Barlow, Globe and Mail market strategist
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Canadian bank stocks may face valuation headwinds from Liberal tax pledge
The Liberal victory means that the party’s pledge to impose additional taxes on banks and insurers now has traction. In August, the Liberals said that if re-elected they would impose a 3-per-cent surtax on financial firms that generate an annual profit of more than $1-billion – a measure that would apply to all of the Big Six banks, along with Great-West Lifeco Inc., Manulife Financial Corp. and Sun Life Financial Inc. The problem for investors here: The surtax is just one potential new revenue source that the federal government is examining, raising the question of whether this dividend-generating sector is now facing rising political risk that will weigh on valuations. David Berman reports.
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Why China’s Evergrande is causing anxiety in global markets with the possibility of a default on debt
Mounting problems at China Evergrande, the hugely indebted Chinese property developer, are rattling global financial markets as investors worry about the potential for an Asian reprise of the U.S. financial crisis of more than a decade ago. Ian McGugan explains why that’s not very likely to happen.
U.S. dollar smiling from ear to ear after the past week’s stock market shakeout
Whether investors run for the hills or not after the past week’s stock market shakeout, the episode provides a glimpse of where to run for cover - and the U.S. dollar came up trumps. Mike Dolan of Reuters explains.
Higher taxes are coming and for global markets, that could be a good thing
And so it begins: Taxes in the world’s wealthiest countries are rising. Inevitable perhaps given the unprecedented COVID-era debt surge and, according to some investors, even a good thing if it helps close the wealth gaps the pandemic has exacerbated. Dhara Ranasinghe and Sujata Rao of Reuters report.
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Ask Globe Investor
Question: I’m hoping you can clear up some confusion around dividend record dates and ex-dividend dates and explain when an investor needs to buy a stock to get the dividend. Case in point: I bought Leon’s Furniture Ltd. (LNF) on Sept. 3, hoping to receive the special dividend of $1.25 per common share payable on Oct. 8, but I’m concerned that I might have been too late.
Answer: Based on the e-mails I receive, dividend record dates and ex-dividend dates confuse a lot of investors. Today, I’ll explain what these dates mean. Then, I’ll demonstrate why, contrary to what many investors think, buying a stock in time to receive the next dividend doesn’t actually do them any good.
Let’s use Leon’s Furniture as an example.
On Aug. 11, the retailer declared a regular dividend of 16 cents a share. Because furniture sales have been strong, Leon’s also declared a special dividend of $1.25 a share. Both dividends are payable on Oct. 8 to shareholders of record at the close of business on Sept. 8, so I’m going to treat this as one big dividend of $1.41 a share.
Now for a skill-testing question: If the record date for the dividend is Sept. 8, by what date would an investor need to purchase the shares in order to receive the payment?
Before we answer the question, we need to briefly review something called the settlement period. When you buy a stock, you don’t become a shareholder of record immediately. It takes two business days from the trade date for the purchase to settle – that is, for the cash and shares to actually change hands – which is known in industry shorthand as T+2. (The settlement period for equity trades used to be three business days but was shortened to two in 2017.)
Simple enough, right? But with weekends and holidays, things can get a bit tricky. In the case of Leon’s, to be a shareholder of record at the close of business on Sept. 8, an investor would have had to purchase the shares no later than Sept. 3. That’s because Sept. 4 and 5 fell on a weekend and Sept. 6 was Labour Day, leaving Sept. 7 and 8 as the two business days in the T+2 formula.
It should be evident by now that, if an investor waited until Sept. 7 to purchase Leon’s shares, the trade would have settled on Sept. 9, which is one day after the record date and too late to receive the $1.41 dividend.
In this case, Sept. 7 is the ex-dividend date, because anyone purchasing the stock on or after this date won’t receive the dividend. (If this is starting to get confusing, it may help to remember that, with a T+2 settlement period, the ex-dividend date is always one business day before the record date.)
Now, it’s no secret that I love dividends. But some investors love dividends so much they think they can game the system by purchasing shares before the ex-dividend date to make some easy money. But, as we’ll see with Leon’s, it doesn’t work that way.
If you look up the trading history for Leon’s on Globeinvestor.com, you’ll notice that the shares had an unusually large drop of $1.48 or 6 per cent on Sept. 7, the ex-dividend date. You’ll also notice the decline was very similar in size to the $1.41 dividend that buyers on (or after) the ex-dividend date will not receive. Coincidence? Nope.
In effect, the market was giving buyers on the ex-dividend date a 6-per-cent discount to make up for the fact that they aren’t entitled to the dividend.
The good news for the reader is that, by purchasing his shares before the ex-dividend date, he will receive the $1.41 dividend. The bad news is that, because his Leon’s shares subsequently dropped by roughly the value of the dividend, he’s no further ahead.
If making money were as simple as buying stocks before the ex-dividend date, we would all mortgage our homes and repeat the process over and over until we could retire in comfort on a private island. Unfortunately, in an efficient market, investing doesn’t offer that sort of free lunch.
What’s up in the days ahead
Rob Carrick checks in with what’s happening with that $200-billion in cash that was stashed away by Canadians during the pandemic. A lot of it, he’ll report, is earning zero in interest.
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Compiled by Globe Investor Staff